Governance easiest ESG pillar to report on, say UK small and mid-caps

More than three quarters (77 percent) of UK small and mid-cap companies surveyed for the latest ESG research from the Quoted Companies Alliance (QCA) say the governance pillar of ESG is the easiest to address and disclose on.

Interestingly, more than half (53 percent) say the environmental factor is the hardest ESG pillar to address and make disclosures on. While this is higher than the 42 percent that consider the social pillar to be the most difficult to report on, neither element is seen as being easy to address (7 percent say social is easiest, 16 percent say the same for the environment).

The research also finds that 60 percent are following an environmental framework and that 75 percent are measuring their carbon footprint – though the body further notes differences in opinion on the usefulness of environmental frameworks: ‘While some respondents believe frameworks such as [Streamlined Energy and Carbon Reporting] and TCFD are straightforward, others believe they are of limited value and an overall burden to small companies.’

On the social side, almost nine in10 respondents tell the QCA they are ‘addressing’ the social aspect of ESG and 60 percent say they are ‘collecting data and using guides/tools/research to help inform the social pillar’.

Positive attitudes to ESG

Surveying its members on attitudes and approaches to ESG, the QCA, which represents small and mid-cap UK-listed companies, finds that around seven in 10 have a ‘very positive’ attitude to ESG, with just under two thirds saying they have a ‘clear and formal’ ESG strategy or policy in place. But less than half of those surveyed (47 percent) feel ESG considerations have a ‘somewhat positive impact’ on their overall business.

Comparing the results with the QCA’s 2020 survey, the body notes: ‘On the surface, there does not seem to be a huge shift in terms of the knowledge and understanding of ESG. Similarly, there has not been an increase in the number of companies implementing an ESG policy and strategy.’

It adds, however, that ‘anecdotally the quality of these statements has improved, at the behest of investors and with the view of benchmarking against more advanced peers.

‘When it comes to making disclosures, companies feel as though the governance pillar is the easiest to address. There is no outright consensus about which of the environmental or social pillars is more difficult to report on. This shows how differently companies view the wider challenge and their own capability in terms of gathering data and measuring [its] impact.’

When asked how informed they consider themselves to be on ESG issues, all respondents report some level of understanding. Almost two thirds (65 percent) consider themselves and their companies to be moderately informed on the subject, says the QCA, with a fifth (21 percent) being very well informed and only 7 percent considering themselves not very well informed. No respondents consider themselves to be not informed at all.

‘Companies, independently of their sectors and market capitalization, are now informing themselves on ESG, whether they support this move toward a more sustainable economy or not,’ says the organization, which recently named a new chief executive in the form of James Ashton, who will take over from Tim Ward at the end of this month.

Interestingly, though, these figures are down on the last time the QCA surveyed members on ESG in 2020, when a slightly higher proportion felt they were knowledgeable about ESG (23 percent said they were very knowledgeable, compared with this year’s 21 percent, and 69 percent saw themselves as moderately knowledgeable, compared with 67 percent this year).

‘This potentially indicates that, due to the ESG landscape’s continual development and expansion, companies are less confident in where they stand,’ says the QCA, adding that ‘it is notable that some companies are feeling overwhelmed by all the new information and expectations’.

Internal challenges

Although 40 percent of the companies surveyed say they currently do not have a clear and formal ESG strategy in place, the QCA says most of these are in the process of gathering information in order to develop such a strategy – though internal challenges remain.

Respondents have stressed the lack of internal resources and time available to produce a separate policy and strategy, says the body, with one respondent in particular claiming that ‘ESG encompasses everything’ his firm does and it is therefore impossible for it to separate its ESG strategy from its overall strategy.

‘Companies are also becoming more and more aware of the pressure investors are placing on them to address ESG-related matters and follow certain requirements/rules, even when they are not mandatorily required to apply them due to the size and nature of the company,’ says the QCA, adding that most respondents express a desire to develop and work toward an overarching policy or strategy that encompasses all three ESG pillars.

The survey consists of 17 questions relating to attitudes and strategies, data collection and reporting, the use of external service providers and the impact ESG has had. The purpose of the survey is to establish a more comprehensive view of what QCA members’ perspectives are on ESG and the possible role the QCA can play in assisting them with their ESG-related disclosures and initiatives.

Of the 60 percent of UK small and mid-cap firms that say they already have an ESG strategy in place, the QCA describes the approach as ‘fragmented’ due to the broad nature of the ESG umbrella.

‘Some companies might have well-developed environmental and governance policies, but their social policy might not be as well developed, or vice versa,’ it notes. ‘Most of the 60 percent of respondents with an ESG strategy and policy have developed an ESG roadmap comprising defined ESG strategies and goals or have recently produced an ESG report containing information related to their ESG disclosures and initiatives.

‘Companies have also introduced ESG committees and/or appointed sustainability managers entrusted with developing and implementing a sustainability strategy, which includes setting targets and overseeing how the company meets various ESG criteria. While most respondents believe ESG to be fully incorporated into their overall strategy, other respondents struggle to combine policies on social responsibility and environmental responsibility into a single ESG policy.’

This research consisted of six in-depth interviews with directors of QCA member companies in March 2022 and an online survey of QCA members between March and April 2022. The survey received a response from 57 companies.