For small and growth companies starting out on their environment, social and governance (ESG) journey it can be hard to know what to do, in what order, and what to delay until the company has grown more.
We’re always working with private equity portfolio companies, and we know what they expect from their portfolio companies. We also know what ESG rating schemes (e.g. MSCI, Sustainalytics, ISS, etc.) evaluate company ESG performance on. Put these together, and if you want to attract investors, there are three clear priorities:
Write some policies. Investors want to see what you stand for. A policy formally summarises your approach to business day-in, day-out. For example, investors want to know that you’re committed to operating ethically, without bribery, while treating people fairly and with consideration for the environment. Formalising these into individual policies is standard for larger companies but for smaller companies a single ESG policy or Code of Conduct summarising these will do.
Start measuring and sharing your data. The usual mantra of, “what’s measured is managed” is simply not the case here. Potential investors don’t know your business and they want to manage their risk. The purpose of data collection and reporting here is to demonstrate that your company has low ESG risk. For example, if you don’t generate any hazardous waste or discharge effluents to water, say so. It might seem obvious to you, but it won’t be to an outsider. Ideally a key performance indicator download (PDF or Excel) on your website should be available so that investors and the bots used by ESG rating schemes can readily find your information.
Know the legislative landscape. Thankfully, ESG-related legislation for smaller businesses is light but this will change as you grow. For UK companies, the first three pieces of legislation you’re likely to encounter are the Modern Slavery Act (applicable when turnover reaches £36m+), Gender Pay Gap Reporting (applicable when employee numbers reach 250) and the Energy Saving Opportunity Scheme (ESOS), which is applicable when employee numbers reach 250, or when the company has both £44m turnover and £38m balance sheet. If you’re nearing these thresholds, start taking steps to meet these legislative requirements, and if not, communicate to potential investors that you’re aware of this legislation and have checked its applicability to your business.
Of course, as you grow, there’ll be more to do; not least setting an ESG strategy and most likely, GHG emission reduction targets, but there are good reasons not to do these straight away. Firstly, they’re costly, and secondly, for small and high growth companies, establishing a GHG emissions baseline too soon can make target deliverability virtually unachievable. Stick to policies, data, and legislative compliance for now and you’ll find that with minimal cost and effort you’ve significantly broadened your investor appeal.
Authored by Caroline Johnstone.
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