Mid-sized market at risk of missing out on funding due to lack of ESG strategy setting

Mid-sized businesses falling behind on ESG agendas are at risk of missing out on a new batch of funding as lenders become more selective and ESG-focused investment funds continue to rise, according to Dave Munton, head of UK markets and clients at Grant Thornton.

“Banks, particularly in the UK, and private equity [firms] are looking to invest into the mid-market,” Munton said, but “there are big funds earmarked for ESG specific investments, so that is really starting to direct how many lending decisions are being taken.

“Funders recognize that if businesses aren’t taking that seriously, those businesses are going to get left behind,” he added.

Almost half (49 percent) of mid-sized businesses have not set a net-zero strategy, according to research by Grant Thornton. Additionally, 36 percent have not calculated their carbon emissions for the last year and 52 percent have not reported their carbon emissions externally.

While a “line hasn’t been drawn in the sand yet”, external pressure keeps mounting from shareholders and governments setting ambitious climate targets, which means the situation is getting close to a point of no return for businesses who have not set a net zero strategy, said Munton.

Only 3 percent of mid-sized businesses said they felt no pressure at all from stakeholders on environmental and social issues, the report found.

Mid-sized companies noted some of the main barriers holding them back from progressing their ESG agenda was a lack of senior management support, understanding of what is required and resource.

Matthew DiGuiseppe, vice president of research and ESG at Saas platform Diligent, said corporates may struggle as “business information systems weren’t created with ESG in mind”.

“It’s really important especially for small and mid-sized companies to think about how they’re going to solve that data problem effectively so they’re not approaching it as a one-time reporting activity – but doing data collection in a more automated manner so they can think about continuous monitoring around their performance,” the analyst said.

ESG-linked compensation plans

Increased risks of missing out on funding comes at a time when ESG strategies are becoming more and more a 360° business-operation pressure, to the point that ESG targets and goals are being included in companies’ executive compensation plans.

The number of companies in the EU with ESG KPIs in compensation packages has in fact jumped from 4 percent in 2008 to 34 percent in 2020, according to a recent report by Diligent. The energy (59 percent) and utilities (64 percent) sectors had the highest amount of companies incorporating ESG metrics in their compensation plans.

“At the end of the day, you get what you incentivise,” said DiGuiseppe. Companies should therefore ensure ESG KPIs in executive compensation plans clearly align with the overall ESG strategy of the business to be most effective, he said.

At the present stage, ESG-linked compensation plans are more likely to be used in larger organisations due to the maturity of their ESG program, data collection and availability, he added. “The larger companies have more robust systems in place [that] makes it easier to bring [ESG metrics] into the program.”

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