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Environmental, social and corporate governance (ESG) issues are quickly becoming a key factor in making investment decisions. A company’s ethical and sustainability efforts affect who invests and for how much. Despite ESG becoming a priority, many financial services companies still don’t know how organizations produce this data. In fact, a recent CoreData Research survey found that more than half (53%) of advisors have limited knowledge of ESG issues, while 42 percent said more information would encourage them to invest more sustainably.
This is where an important problem arises. Investors are unaware that many organizations cannot provide ESG data – not out of a lack of interest or will, but because of external factors that make it more difficult for them to report on their impact. It is this challenge in which the financial sector must play a greater role: lowering barriers to entry and creating more investment opportunities for the market.
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The ESG entrance fee
Most companies struggle to obtain ESG data and produce the relevant reports because of one simple problem: cost. In most cases, companies have to spend tens of thousands of pounds on consultants to get this information. For those earlier in their journey, where product development and sales are a priority, these costs are too high.
Even if a company is willing to spend consultancy fees, it will still take a long time to collect the relevant data. Companies need to identify the material issues that matter to their stakeholders, compare their own activities with those of suppliers, wait for third parties to share information, and summarize the piles of data in an accessible and attractive report to investors. It’s no wonder that many companies simply give up on providing ESG data as a result.
Lack of data, lack of opportunities
It’s easy for investors to think that these challenges don’t affect them. But the reality is that companies that cannot provide ESG data are only limiting market opportunities.
The significant costs associated with preparing ESG reports mean that early-growth companies are often the ones that miss out, as investors overlook these otherwise attractive companies to those who can demonstrate their ESG qualifications.
By the time these smaller companies have grown and can afford the production of ESG reports, it may be too late. These companies will have scaled up and no longer offer the lucrative returns they had in their infancy.
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Leading from top to bottom
To get a broader pool of investment opportunities, the financial community needs to get involved. Investors should encourage companies to produce ESG data and educate them on the tools available to streamline the process, from those that provide industry benchmarks as a starting point for companies when deciding what to report on, to others that enable real-time carbon reductions. to make . This top-down support will allow smaller companies to attract investors, while diversifying the market and giving investors more choice.
ESG is well on its way to becoming business-as-usual, rather than fun to have for investors. However, there is still a widespread perception that ESG is only accessible to companies with deep pockets. Financial institutions are in a powerful position to change this and not only offer more lucrative opportunities for investors, but also enable the companies themselves to reap the financial and reputational benefits of doing business ethically and sustainably.
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