Business Payment Practices and Performance data: a useful tool in the ESG toolkit

One of the hottest topics in current business and investor community conversations is the role ESG is playing in the boardroom and how it may develop. There is a clear requirement for businesses and their investors to demonstrate a commitment to ESG criteria and be in full control of their reporting. We think an important addition to the ESG debate should be the Business Payment Practices and Performance data, hosted on the BEIS portal.

The portal features publicly available data that has been self-reported by the UK’s largest companies on, amongst other things, how quickly they pay their supply chain and whether they have paid within their agreed terms. The portal also provides reporting businesses with a public forum to demonstrate strong commitments to social and ethical practices.

Pushing payment practices up the ESG agenda

Late payment, particularly to small businesses, can create significant mental health, administrative and financial burdens. Relevant to the ‘Social’ and ‘Governance’ aspects of ESG, sustainable and responsible payments to suppliers is critical to creating a collaborative economy.

Liz Barclay, Small Business Commissioner, has been a long-standing advocate of payment times being a fundamental part of the ESG agenda. While late payment throughout the economy ties up capital, reduces investment and stifles growth, it also has a disproportionate impact on thousands of SME businesses and their employees that should not be underestimated.

“The impact of late payment is not just financial, it’s also emotional. My predecessor and I have talked to thousands of small businesses through lockdown on webinars and virtual forums and heard many harrowing stories from business owners. People who are living their passion and dream through running a business but who can be incredibly vulnerable.

As a result of worrying whether a payment is going to arrive or not, they suffer from mental health issues which can cause relationship difficulties, breakdowns, sleeplessness, mood swings and anxiety. Cash flow is the lifeblood of businesses and, when it runs out, they fail. It’s as simple as that and I fully support the use of the data to raise awareness and improve practices to support the social element of ESG.”

How important are payment practices to the investor community?

To gauge how important payment practices and supplier payment performance is to the investor community and to consider how a set of companies invested in due to their ESG credentials perform, we analysed the Payment Practices and Performance data of 5 ESG fund’s largest investments.

We reviewed the Top 10 UK holdings of 5 of the most popular ESG funds to reflect on how they performed and whether their practices were consistent with the ESG agenda. While the analysis showed a majority of companies performed well in adhering to ethical principles, the data suggests supplier payments are an overlooked topic for many.

The analysis shows that of the 41 companies reviewed:

• 14 (35%) had weak or mixed performance
• 3 (7%) appear not to be reporting despite being required to.

Looking at submissions within the data posted during 2020 and 2021 we found that:

• 16% of reports submitted have average payment days above 60 days
• 35% of reports submitted have a fifth or more suppliers being paid in excess of 60 days
• A third of reports submitted have 20% or more suppliers not being paid inside the agreed terms
• One major company pays only 10% of their invoices to agreed terms and 15% of their invoices after over 60 days.

The Small Business Commissioner added:

“Payment practices provide amazing insight for Chairs, Non-Executive Directors, and Chairs of Audit, Risk and Assurance Committees. You need to get under the bonnet and assess how well firms are treating their suppliers.

Investors are increasingly concerned about payment practices and collaborative, mutually beneficial relationships between customers and suppliers. Payment practices are a Board responsibility and should be included in ESG measures. Too few board members know how payments are handled in their firms.”

Despite Payment Practices and Performance data being easily available and providing a good measure of commitment to social responsibility, our analysis suggests that the data is not currently being scrutinised under an ESG lens. This should change and companies need to be mindful of how their practices are viewed by external stakeholders.

Should you have any questions on any aspect of payment practice reporting, please feel free to contact Ross McWhir.