Beyond Regulation: how continued sustainability disclosure by SMEs builds investor trust
As investor demand for environmental, social and governance (ESG) data grows, small and medium-sized enterprises (SMEs) have a unique opportunity to build trust and attract capital through voluntary, meaningful sustainability reporting. Despite existing challenges and the easing of European Union (EU) regulatory sustainability reporting demands, regularly reporting on key areas such as emissions, workforce diversity and governance can help SMEs strengthen their growth prospects and appeal to long-term investors. This article explores how sustainability reporting, if done right, can be a strategic asset, not a burden.
By Dr Rupini Deepa Sobottka
Sustainability reporting has faced growing criticism, often seen as burdensome due to complex and evolving regulations and a lack of consistent standards. Despite these concerns, investor appetite for ESG-related information remains strong. As more investors align their portfolios with sustainable strategies, the call for greater ESG transparency from companies continues to rise. In Germany, SMEs represent 99.2% of all companies, according to IfM Bonn, underscoring the vast, untapped potential for ESG reporting.
Investor demand for ESG data persists
Despite the EU’s proposed reductions in mandatory ESG disclosures under the Omnibus simplification package, where far fewer companies are expected to fall under the CSRD reporting requirements, investors continue to look for access to comprehensive ESG data. A survey from BNP Paribas in 2023 indicated that 71% of respondents say incomplete ESG data is the biggest barrier to sustainability-focused investing. Investing in SMEs traditionally carries higher information risk due to limited reporting and transparency in comparison to large corporates. ESG disclosures can help to reduce this information asymmetry. Continuous disclosure provides investors with trendlines, not just snapshots–vital for evaluating growth potential and systemic risk exposure.
Tackling ESG data gaps: a key barrier to ESG integration
Even partial or qualitative reporting of ESG information, if consistent and relevant, can help fill critical gaps, improve benchmarking and build a clearer picture of a company’s sustainability performance. Some data gaps that we as investors at Berenberg Wealth and Asset Management (WAM) have seen within SMEs usually revolve around the following areas (not an exhaustive list):
Environmental data gaps: i) Carbon emissions, where many companies lack the expertise to measure or report these across their operations, energy use and value chain; ii) Energy consumption data which is infrequently measured and not broken down by renewable vs non-renewable.
Social data gaps: i) Workforce diversity, equity and inclusion data that is not disaggregated based on gender, age or even set KPIs; ii) Supply chain practices with limited visibility on labour or human rights issues within suppliers; iii) Labour practices including reporting on wages, employee training and retention.
Governance data gaps: i) Board structure including compensation, diversity, independence and skills; ii) Incentives by executives that lack transparency for metrics on long-term and short-term benefits
As investors we understand the struggles that SMEs have in reporting, and we should not allow the lack of ESG data to hinder investments in SMEs. Therefore, when reviewing ESG disclosures from SMEs, we are not looking for exhaustive, corporate-style reports. Instead, we value:
Materiality: Are the ESG issues disclosed relevant to the company’s sector and size?
Consistency: Are reports published regularly and do they include progress metrics, not just aspirational goals?
Authenticity: Is the tone genuine with proper reasoning, and are challenges acknowledged alongside successes?
Integration: Are ESG principles embedded in strategy and operations, not limited to CSR initiatives?
When SMEs address these questions through ongoing ESG disclosure, it builds investor trust by signalling that the company understands its responsibilities and is actively developing long-term, sustainable strategies – particularly with future growth in mind.
Furthermore, investors and companies should use engagement as a source of building trust and provide each other with progress information to tackle the data gaps. Asset managers value transparency in their investee companies. Voluntary ESG reporting by SMEs can serve as a signal of commitment to sustainability.
ESG-aligned SMEs unlock new capital channels
With sustainable investing now firmly embedded in the financial industry, SMEs that maintain robust ESG reporting can differentiate themselves in a competitive market. As investors, we at Berenberg WAM integrate ESG considerations into portfolio construction because it makes perfect sense from a risk and opportunity standpoint. Therefore, SMEs that disclose ESG performance are simply more investable. They align with ESG-focused funds, sustainable debt instruments and impact investment mandates.
Moreover, transparent SMEs demonstrate preparedness for future growth or exit opportunities. Whether they aim to scale, attract institutional capital or eventually go public, their ESG maturity can increase their perceived value and lower perceived risk.
Conclusion: ESG as a long-term signal
Ultimately, ESG disclosure by SMEs is not about appeasing investors but rather attracting the right ones. Transparent and consistent ESG disclosure allows SMEs to bridge critical information gaps, reduce perceived investment risks, and strengthen investor trust. As sustainable investing becomes an enduring part of financial markets, ESG-aligned SMEs are better positioned to access capital and demonstrate long-term value creation. Transparent ESG reporting may therefore not be a regulatory burden, but rather a strategic enabler of growth.
Dr Rupini Deepa Sobottka
has been heading the ESG Office at Berenberg Wealth and Asset Management (WAM) since 2018. She currently contributes to the DVFA Commission’s Sustainability working group and is a member of the Technical Committee on Sustainability Reporting of DRSC.