Much will change in many countries from next year onwards with regard to reporting on non-financial aspects relating to environmental, social and governance (ESG) issues. Until now, ESG reporting has been of particular relevance for large corporations. However, this matter is also becoming increasingly important for exporting SMEs. Firstly, more and more SME customers around the world are required to report information about their value chain, i.e. about suppliers, regardless of their size. Secondly, the ESG aspect is growing in significance in tenders and bids.
The biggest changes affect companies that export to European countries, or that have branches in the EU region. Many Swiss manufacturing companies are already sustainably positioned, but are not yet aware that this fact can be used to their competitive advantage.
Gabrielle Lang, co-founder of the sustainability consulting firm Thinkdot, explains the most important developments in ESG reporting, and shows how Swiss companies in the export business are affected by this.
Ms. Lang, what will Swiss exporting companies need to do in terms of ESG reporting?
The coming year marks an important step towards sustainability for the countries of the European Union, as the revised Corporate Sustainability Reporting Directive (CSRD) enters into force. The comprehensive European Sustainability Reporting Standards (ESRS) are a key component of this new framework. Who has to report on the individual topics, and when, is defined in stages. Companies with more than 500 employees will have to report from 2024 onwards.
Small companies have no direct obligation to report on non-financial matters. Since ESG reporting obliges large companies to include their supply chains, SMEs must also provide their big customers with accurate data and enter into obligations (supplier codes of conduct). This also applies to suppliers outside the EU. To start with, environmental information is required; suppliers to large companies will also have to provide information on social issues as early as 2026.
What regulations apply to countries outside the EU?
In addition to the new EU requirements, new ESG reporting regulations are also in force, or soon will come into force, in practically all industrialized nations. As in Switzerland, TCFD (Task Force on Climate-Related Financial Disclosures) reporting is mandatory for large companies in many countries. TCFD focuses primarily on environmental issues, with countries requiring TCFD reporting for larger companies including Switzerland, the UK, New Zealand, Hong Kong, Japan, Singapore, Canada, and Brazil.
Here, too, suppliers are usually obliged to provide their customers with data for reporting purposes – which means that exporting SMEs are also affected.
How exactly can an SME prepare for ESG reporting?
Start small and build things up systematically. Simply put, a company’s carbon footprint is always at the core of any ESG report. It is advisable to approach this pragmatically, identifying what has the greatest impact on ESG issues within the company’s value chain, such as emissions. We call this the materiality analysis. The content of this analysis should be based on one of the comprehensive ESG standards (e.g. ESRS or GRI).
Data is collected and analyzed, and targets are set, for topics classified as material. Care should be taken at the outset not to get bogged down with unimportant information, or information that is very difficult to obtain. Over time, reporting will become more and more comprehensive and detailed.
Data infrastructure and processes are set up for strategy development and reporting in order to prepare the company for ESG in the short, medium and long term with as little outlay as possible.
Which outweighs the other: the obligation or the opportunity?
Our economy has undergone a remarkable transformation: it increasingly takes into account not only economic indicators, but also environmental, social and ethical values. This expanded perspective is picking up pace. The ESG approach is gaining ground, and will continue to do so. Accordingly, ESG aspects, particularly CO2 emissions, are becoming more and more important as evaluation criteria for tenders.
ESG reporting is not yet mandatory for SMEs. However, it can be assumed that it will become mandatory in a growing number of markets in the foreseeable future. Companies that are prepared for this will have a competitive edge.
A successful company needs to be fit and transparent in the area of ESG, just as it does in the established disciplines of procurement, production, sales, and finance.
For exporting SMEs, collecting data and using it to manage their company is nothing new. What is new, though, is that the scope of observation extends beyond the company, and also includes the upstream and downstream value chain.
SMEs that invest in ESG topics and communicate this transparently via the necessary standards will have a significant competitive advantage.
Thinkdot is a start-up that helps Swiss SMEs introduce efficient, standards-based ESG reporting by providing individual advice and an innovative digital platform.