Supply chain and ESG data requests

Key takeaways

• New sustainability reporting standards are increasing demand for reliable ESG data.
• Large companies and investors now require more detailed disclosures from suppliers and portfolio companies.
• Smaller and mid-size businesses risk commercial and investment losses if they cannot provide credible ESG data.
• Proactive ESG data collection aligned with recognised standards can strengthen market positioning.

Rising demand for ESG data across supply chains

Businesses of all sizes are experiencing an increase in requests for environmental, social and governance data from investors, corporate customers and other business partners. This trend is driven by new sustainability reporting regulations that require large companies to disclose more comprehensive ESG information. As a result, they are turning to their suppliers and portfolio companies to provide reliable, consistent and decision useful data.

For mid-size and small businesses, the ability to respond to these requests is becoming a competitive differentiator. Failing to provide ESG data can put contracts, investment opportunities and key commercial relationships at risk.

Understanding the impact of ISSB global standards

One major driver of increased disclosure expectations are the the International Sustainability Standards Board (ISSB)’s sustainability standards, released in 2023. These standards, IFRS S1 and IFRS S2, have already been adopted, otherwise used or are in the process of being incorporated into regulatory frameworks across 36 jurisdictions, including the United Kingdom, Hong Kong, Singapore and China.

IFRS S1 sets out general sustainability related financial disclosure requirements. IFRS S2 focuses specifically on climate. It builds on the Taskforce on Climate Related Financial Disclosures (TCFD) framework but raises expectations considerably. Research suggests that more than half of the IFRS S2 requirements go beyond TCFD, with a further quarter representing significant advancements.

In practice, reporting in line with IFRS S2 requires:

• Detailed climate governance disclosures
• Analysis of the resilience of business strategy to climate risks
• Mandatory reporting of Scope 3 emissions
• Information on transition plans, carbon credit use and climate scenario analysis

These requirements increase the volume, complexity and specificity of climate data that businesses must provide, and this expectation filters directly into supply chains.

Preparing for UK Sustainability Reporting Standards

The United Kingdom is developing its own UK Sustainability Reporting Standards, which are based on the ISSB standards. Drafts of UK SRS S1 and UK SRS S2 were released for consultation as part of the government’s sustainable finance framework.

The UK SRS follows the same four pillars of the ISSB Standards and the TCFD framework that will be familiar to many businesses:

• Governance processes for sustainability and climate issues;
• Strategy for managing sustainability and climate risks and opportunities;
• Risk management processes for identifying and prioritising these issues; and
• Metrics and targets used to measure performance and progress.

Final versions of UK SRS S1 and S2 are expected to be published for voluntary use soon. Mandatory reporting is expected to follow once the UK government and the Financial Conduct Authority complete further evaluation.

Businesses already reporting in line with TCFD are well placed, but alignment with ISSB and UK SRS goes beyond climate and covers a broader sustainability scope. A gap analysis will be essential.

Using the VSME Standard to streamline ESG reporting

While ESG reporting demands are increasing, smaller and mid-size businesses do not have to respond in a piecemeal or ad hoc way. A more strategic and cost effective approach is to identify the ESG issues that are most material to your business and proactively build a minimum viable ESG dataset.

One helpful tool is the Voluntary Sustainability Reporting Standard for SMEs, known as the VSME, recommended by the European Commission. The VSME aims to simplify ESG reporting for smaller organisations and help them respond to requests from larger partners.

It offers:

• A Basic module and a Comprehensive module,
• Coverage of environmental, social and governance metrics,
• Proportionate and flexible reporting expectations and
• Permission to omit commercially sensitive information.

Aligning with the VSME standard is voluntary, but businesses that adopt it can position themselves as transparent, credible and supplier ready. In competitive markets, this can enhance access to capital and support long term commercial relationships.

Practical steps for smaller and mid-size businesses

To stay ahead of ESG data requests, mid-size and small businesses should take the following steps now:

• Identify material ESG issues that are likely to influence financial performance and stakeholder expectations;
• Review existing data and evaluate whether it is reliable, consistent and verifiable;
• Identify gaps in ESG data and develop a plan to collect or improve missing information; and
• Ensure leadership oversight, as governance is critical to credibility and effective reporting.

ESG data collection is quickly becoming essential rather than optional. By acting early and aligning practices with recognised standards, businesses can avoid costly last minute responses and strengthen their role as trusted partners to investors and major customers.

For a more detailed explanation of the issues covered in this article, please watch the accompanying video. If you would like tailored advice on ESG reporting, data readiness or supply chain engagement, please contact Kerry Stares or your usual Charles Russell Speechlys adviser.