Environmental, Social, and Governance (ESG) factors are three components that companies, both big and small, need to consider when evaluating their operations and impact. A businesses approach to ESG provides a framework to assess impact on the world beyond just financial returns. These factors can also help investors, employees, and customers assess how you are addressing social and environmental issues, and ensure that they are being run in a responsible and sustainable way. In our recent SME Sustainability Survey, over 75% of businesses stated they did not have a set ESG strategy for the next 12 months, which makes it clear that a strong focus is needed in the short term. Businesses need to prioritise adopting a strong ESG strategy, so let’s break it down further.
The Environment
The “E” in ESG refers to environmental criteria. This includes the energy a company consumes, the waste it generates, the resources it uses, and the impact on the world around us. This also encompasses carbon emissions and climate change. Environmental considerations are crucial for every company because every business uses energy and resources that have an impact on the environment. Some of the questions you can ask yourself as a small business are: Do you recycle? Do you print excessive physical documents that could go digital?
The Social
The “S” in ESG represents social criteria. This addresses the relationships a company fosters with people and institutions in the communities where it operates. This includes labour relations, diversity, and inclusion. Social factors are important because every company operates within a broader, diverse society. Consider social initiatives your business is involved in or economic empowerment policies you have in place as a business.
The Governance
The “G” in ESG stands for governance, which refers to the internal system of practices, controls, and procedures a company adopts to govern itself, make effective decisions, comply with the law, and meet the needs of external stakeholders. Governance is essential for every company, which is itself a legal entity requiring governance. It typically involves establishing policies and procedures that address ESG issues, as well as identifying and managing risks and opportunities related to these factors. This may include conducting assessments of a company’s environmental and social impact, engaging with stakeholders to understand their perspectives and concerns, and establishing targets and metrics to measure progress.
Now that we have a better understanding of ESG, how can you as an SME benefit? SMEs have a unique opportunity to make a positive impact through their business practices, and ESG can help achieve that goal. Here are 6 reasons to embrace ESG as a small business owner.
1. Enhanced Reputation and Credibility
By focusing on ESG factors, SMEs can improve their reputation and credibility. ESG-aware customers and investors are more likely to choose companies that align with their values, and are more likely to recommend them to others. The proof is in the pudding with 85.3% of businesses in our SME Sustainability Survey stating that sustainability credentials are important when choosing their suppliers. Building a strong reputation for ESG practices can also help SMEs attract and retain top talent. ESG should form a part of your business’ core values.
2. Improved Risk Management
Considering ESG factors can help SMEs identify potential risks and opportunities. Environmental risks such as climate change and water scarcity can impact a business’ operations and supply chain. By understanding this, SMEs can take steps to mitigate them, reducing the likelihood of negative impacts.
3. Better Financial Performance
ESG practices can contribute to better financial performance over the long term. Companies that prioritise ESG factors are often more innovative, efficient, and resilient – leading to improved financial returns. ESG can also help SMEs access new markets and funding sources.
4. Increased Stakeholder Engagement
ESG practices can help SMEs engage with stakeholders like customers, employees, and investors. By sharing their ESG practices and progress, SMEs can build trust and transparency with their stakeholders, leading to stronger relationships and loyalty. Even as a small business the key is to have a big business mindset when it comes to sustainability.
5. Positive Social and Environmental Impact
By focusing on ESG factors, SMEs can contribute to positive social and environmental impacts. Implementing sustainable practices can reduce your carbon footprint and promote environmental conservation. Social initiatives such as supporting local communities and investing in employee training can only have a positive impact on society and your business’ long-term sustainability.
6. Regulatory Compliance
ESG practices can help SMEs comply with existing and upcoming regulations. Governments around the world are increasingly implementing ESG-related regulations and tax benefits that prioritise ESG practices will be better positioned to comply with these regulations.
For example, the solar panel tax incentive can see businesses claiming a 125% deduction in year 1 for their renewable energy projects from 1 March 2023 to 28 February 2025.
Now that we’ve explored how SMEs can benefit from ESG, here are some practical steps that you can take to get started.
Step 1: Assess Current Practices
Assess current ESG practices and identify areas for improvement. This could include conducting an environmental audit, evaluating employee policies, and assessing supply chain sustainability.
Step 2: Set Goals
Set ESG goals that align with your business objectives. These goals should be specific, measurable, and time-bound.
Step 3: Engage Stakeholders
Engage with stakeholders such as customers, employees, and investors to understand their expectations and priorities regarding ESG.
Step 4: Implement Initiatives
Implement ESG initiatives that align with your goals and stakeholder expectations. This could include initiatives such as reducing waste, investing in employee training, and supporting local communities.
Step 5: Measure and Report Progress
Regularly measure and report your progress towards your ESG goals. This can help identify areas for improvement and demonstrate your commitment to ESG to stakeholders.
We hope this helped break down ESG, and sparked some ways in which you can start implementing these principals into your business.
