The importance of sustainability reporting has become an ever more crucial aspect of business operations in recent years. Sustainability reporting offers numerous advantages, such as enhanced risk management, optimisation of costs and savings, facilitation of decision-making, and the promotion of corporate confidence and reputation among both customers and investors. However, current data is often voluntary, inconsistent and difficult to compare, which hampers investment decisions and stands in the way of allowing businesses to achieve their sustainability ambitions.
The International and EU context
The International Sustainability Standards Board (ISSB) will issue its first two finalised frameworks by the end of June, with an expectation that the first corporate reports aligned with these frameworks will be issued in 2025.
The European Union made available almost final versions of mandatory sustainability reporting standards for EU companies on 9 June. These revisions incorporate modifications based on stakeholder input received for the previous drafts. The four-week consultation will be open until 7 July 2023.
The UK context
The UK Green Finance Strategy, published in March 2023, confirmed the Government’s commitment to the Sustainable Disclosure Requirements (SDR), noting that further detail will be set out in the Summer. The SDR will create an integrated framework for decision-useful disclosures on sustainability across the economy. The proposals set a strong precedent as they send a clear signal that the FCA recognises greenwashing as a barrier to sustainable investment and that sustainability issues can be material to investors’ allocation of capital.
The Strategy also emphasized its support for the ISSB’s frameworks and committed to establishing two advisory committees on integrated sustainability reporting in line with the ISSB’s. Additionally, the UK Green Taxonomy will be subject to consultation in Autumn 2023. Once finalised, the Government will initially require companies to report voluntarily against the taxonomy for a minimum of two reporting years before considering the implementation of mandatory disclosure regulations.
SMEs are key to enable the transition
Despite having over 5.9 million SMEs in the UK (employing 16.8 million and delivering £2.3 trillion to the economy), there is not yet a dominant standard for SMEs to report GHG emissions. Since corporates are acting on reducing their Scope 3 emissions, which involves minimizing emissions throughout their supply chain, SMEs throughout the supply chain must be engaged in decarbonisation. This means that as banks move towards net zero in their portfolios, they are going to need the emissions of the SMEs they back to be reported on and to move towards net zero. If the supply chain is not monitored, it becomes impossible for the corporates to gauge and verify the reduction, resulting in an over-reliance on suppliers’ estimates and self-reports. Consequently, these assertions lack substantiation and validity. Additionally, SMEs do not lack the necessary information and incentives to measure their emissions, meaning the free flow of data within the supply chain ecosystem can be very limited.
The importance of assurable data to tackle greenwashing
The increase in demand for sustainable investment products has raised the risk of greenwashing and undermined trust in sustainable finance. This month, the European Supervisory Authorities (ESAs) released new reports which found that there was a “mismatch between growing demand for ESG products and the limited pool of assets that are deemed sustainable” which leads to competition among market participants to produce sustainable products that can in some cases be misleading.
These reports show again the importance of having assurable and reliable data. Open-source data is an essential tool in facilitating this reporting, allowing companies to disclose their impacts and progress in a transparent and accessible manner. The success of Open Banking proves it is possible to create scalable data-sharing infrastructure with financial-grade security.
Perseus aims to fill in the gap of not having a standard for SME sustainability reporting, with an ambitious operational pilot by COP28. In December, Bankers for Net Zero announced a strategic partnership with the OECD Financing SMEs for Sustainability Platform and there is intense interest in how the initiative can scale globally.
The UK Government has already recognised Perseus in its recently published Green Finance Strategy as a crucial part of the decarbonisation architecture required to ensure the UK reaches its emissions reduction targets.
With Perseus, data will flow automatically from the real economy (energy companies) to the financial economy (banks) with the permission of the customer (SME), and improve the quality and impact of outcomes for stakeholders.
Collaboration is required to achieve net zero
For banks and large enterprises with net-zero targets, it is imperative that they provide decarbonisation support to the SMEs in their portfolios. This support should encompass both gradual and transformative solutions to reduce emissions. Failing to do so will result in these entities falling short of their own commitments, leading to potential reputational risks as well as exposing themselves to transition and physical risks.
Additionally, it is important that everyone in the financial economy works towards the same solution. Perseus is a unique opportunity to contribute to the creation of assurable ESG data and this can only be done by working in pre-competitive collaboration across the market.
Elena Pérez Celis,
Head of Policy & Public Affairs