Optimising ESG disclosures; spending reporting resources effectively
The quality of ESG disclosures differs significantly across the UK small-cap market and both our proprietary data and experience helping firms optimise their reporting, we see several opportunities for the vast majority of firms to improve their ESG reporting. And it’s not about more disclosures, but clearer, more concise ones.
"The most valuable of all talents is that of never using two words when one will do." Thomas Jefferson
Addidat’s data shows there has been a 300% increase in proactive ESG reporting across the small-cap markets over the past 3 years. Over 13% of firms are even producing separate ESG reports.
With the demands and costs that go into producing annual reporting disclosures and standalone ESG reports, does the data tell us there is a business case for this investment?
Small-cap firms who create ESG sections within their annual reports, expanding on their ESG credentials, do achieve a higher maturity score in the Addidat Platform than those who do not, more than doubling their average maturity across 6 different core areas of ESG, from 1.1 to 2.4 (out of 4).
Yet those who also produce standalone ESG reports only marginally increase their performance further to 2.7.
Whilst there is a clear benefit to proactively disclosing ESG performance in the annual report, firms who are producing standalone ESG reports are unlikely to be getting much bang for their buck with the current standard of reporting.
Source: Addidat Platform. Maturity scores are out of 4, and cover 6 core elements of ESG
Common reporting errors in all ESG disclosures result in companies wasting time and money writing, designing, approving and publishing lengthy reports, whilst losing the key messages. This can result in undervaluation of progress, or companies unknowingly overcommitting themselves. It also demonstrates to the more knowledgeable reader and AI models that they really don’t understand what factors of ESG are meaningful for their firm and growth strategy, nor are they managing the real financial risks and opportunities that ESG presents them.
Common errors include:
Missing the point on ESG focusing on planting trees and charity outreach, donations and volunteering initiatives.
Inconsistent or incorrect use of terminology, e.g. consistently confusing carbon neutral and net zero, or assuming non-executive is synonymous with independent. Companies are at best demonstrating their lack of understanding, or at worst, unknowingly exaggerating their performance (e.g. greenwashing).
Poorly structured reports which confuse readers. While some companies attempt to create an 'ESG strategy' by organising existing work, this reads as a clear tell of lack of long-term planning and true mitigation of risk.
Forgetting that ESG disclosures need to be read by machines and humans who have different stylistic preferences and distinct levels of ESG fluency. AI models for investor ratings, for example, require key words, whereas humans will need clear language, pictures and avoidance or explanation of industry jargon.
Lack of precision or substance. An average Addidat Platform maturity score of 2.4 for those who create ESG reports shows that many claims are not backed with sufficient evidence, action or data.
“All companies say they care, right? But few actually exercise that care.” — Simon Sinek
Repetitious year-on-year disclosures without clearly highlighting the achievements and progress in the reporting year.
Poorly considered layouts result in unnecessary restatement of disclosures, e.g. SECR (carbon footprint reporting), and climate related risk disclosures (CFD/TCFD).
ESG concepts overlapping in different places across the annual report are not reported consistently (e.g. across chair and CEO statements, principal risk registers, Corporate Governance statements, board Committee reports).
Errors are increasingly common as data requirements become more complex. Areas like greenhouse gas emissions, where disclosures fail to meet industry standards, contain simple mistakes, and suffer from poor formatting, making it difficult to consume the important or intended information.
At Addidat we strive to remove the ESG burden in the small-cap market, and to help companies thrive and build long-term resilient businesses.
With our AI-driven platform that ingests and analyses disclosures, combined with a team of ESG experts experienced in investment management and running AIM-listed businesses, we are uniquely positioned to help UK small-cap companies enhance their annual reporting in a proportionate way.
The Addidat Platform provides companies and investors with market leading small cap data, allowing companies to communicate with confidence in their strengths and set commitments that will deliver their ESG ambition.
Our team of ESG experts and proprietary methodology reduces internal effort, provide external reassurance, and maximises external value by building credibility, with shorter, sharper disclosures on the areas that really matter to your firm.
