Member Article

Closing the ESG data gap: five solutions to help small businesses reach climate transparency

With increasing regulation and market scrutiny, the need for climate risk clarity and transparency is ramping up for financial services firms. However, the lack of data from small businesses, who make up 99% of UK businesses, poses a significant obstacle for many.

Measuring their greenhouse gas emissions (GHG) is seldom a priority for busy small business owners, leaving financial institutions unable to source accurate data to feed into their financed emissions totals. Consequently, this means they struggle to honour public pledges to shrink their carbon footprints and cannot be transparent about their exposure to climate-related financial risk.

In my opinion there are five potential solutions to help financial institutions bridge the ESG data gap for their small business customers.

1. Government regulation

One possible way to help small businesses reach the goal of climate transparency is through government regulation. The government could establish a national register of small business emissions, building on existing SECR filings that apply to large businesses via Companies House.

This would provide a credible and high coverage set of data attributes to underpin commercial product development. However, concerns regarding data assurance and the administrative burden on business owners are legitimate and must be addressed.

2. Data controller contributed bureau

Following the traditional credit bureau model, controllers of SME climate data assets, such as carbon accounting platforms or industry registers, could share their measured, assured emissions data with an aggregating entity, perhaps in return for a royalty. This approach would simplify the process for small businesses and standardise data from across sources.

Although, the royalties for data originators might not be high enough to encourage them to share valuable private data assets, there could also be transparency challenges due to the General Data Protection Regulation (GDPR). In addition, emissions data would vary in methodology and accuracy by source and would be unlikely to achieve 100% coverage.

3. SME contributed bureau

Small businesses could directly consent to sharing their climate profile data, generated from carbon calculators or expert assessments, with a central bureau service. Small businesses would control how their profile data is shared and which companies or bodies have access to it, simply able to direct companies requesting ESG information to one platform, saving them time and hassle.

This solution offers both flexibility and unifies data from disparate sources. Ensuring consistent measurement methodologies and data quality is essential and would need to be policed across contributing sources.

4. Modelling on ‘actual’ observations

Energy consumption, sector, activity, property, employment, and fleet data in bulk could be used to create an observation of a small business’s climate profile without their knowledge or input.

This would involve zero effort from small businesses and could potentially achieve 100% instant coverage. Accessing data at source would remove the ability to manipulate their profile. It’s important to keep in mind that GDPR and data sensitivity would be a concern. Critical data, such as energy tariff and consumption, fleet mileage and supplier spend, is not currently readily available without consent.

The ability for small businesses to correct any inaccuracies, must also be taken into consideration.

5. Open energy

Lastly, similar to the open banking model, small businesses would grant access to their energy consumption data to underpin their carbon emissions calculation as part of an account onboarding or verification journey. Industry collaboration or government regulation, would ensure uniformity of experience and coverage, building trust and adoption through a common API approach.

Small businesses would be able to maintain control over their data and it enables regular updates - following the tried-and-tested model of open banking. Although, the collected data may not cover all the GHG emissions contributors within a small business. There would also be no full-market database to allow analysis, modelling, or score-building.

In conclusion…

Addressing the ESG data gap for small businesses is a crucial step in tackling climate change. Whether this is carried out through government regulation, collaboration among data controllers or small business driven initiatives - finding a comprehensive solution is vital.

It’s key that financial institutions are working with their small business customers to bridge the ESG data gap and take steps in creating a more sustainable and transparent future for all. With pressure on the industry only growing as regulators, investors and civil society demand climate transparency, all companies must ensure that they are playing their part to mitigate their role in climate change.

This was posted in Bdaily's Members' News section by Scott Harrison .