For many Small and Medium Enterprises (SMEs) around the world, the Environmental, Social and Governance (ESG) regulations are nothing more than an administrative burden with little or no financial upside. The World Bank estimates that SMEs constitute over 90% of companies globally and employee roughly 50% of the entire workforce. Just as SMEs are the engine of economies, they are also key to winning the sustainability agenda. Environmental studies in the UK have shown that SMEs have more than five times the carbon footprint of corporates and yet are the least equipped to review, assess and execute what is required to be compliant. The pressure is mounting for SMEs as the ESG reporting requirements shift from voluntary to mandatory, and the time to act is now.
This article explains why ESG makes good business sense for SMEs and the steps they can take to begin this long and necessary journey.
Why should SMEs implement ESG regulations?
#1 Access to capital
The EY Global Private Equity Survey 2021 showed that two-thirds of investors incorporate ESG in their investment decision-making process. ESG issues can affect a company’s financial performance through its customer base, product use and purchase decisions, brand perception, employee recruitment and relations with other stakeholders such as governments and suppliers.
#2 Supply chain requirements
ESG disclosure is becoming an important part of Third-Party Risk Management (TPRM) thus impacting any SME that supplies large corporates. European companies are the most vulnerable as environmental issues are heavily regulated in Europe and corporates are now required to provide a non-financial statement in their annual report which covers ESGs. SMEs will be required by their corporate clients to follow the same ESG standards.
#3 Going green saves money
The biggest opportunity for SMEs is the ability to save money by going green. SMEs can lower expenses and boost profitability by going green and reducing energy and water consumption.
#4 Socially responsible
SMEs also need to demonstrate that they are good corporate citizens and not immune from requirements to treat employees fairly, promote diversity and inclusion within the workplace, protect human rights, avoid child labour and following other social considerations that make news headlines.
#5 Better governance
SMEs that can track key ESG metrics give investors confidence that they are proactively managing risks. The Global Risk report in 2018 showed that eight of the top ten global risks were ESG-related.
How should SMEs implement ESG?
#1 Increased awareness
SMEs need to proactively seek out information and resources to help them on this journey. Fortunately, many Chambers of Commerce and other forums that support SMEs are recognising this and holding events to raise awareness.
ONGOLO’s partner, CONNECTS, hosted a discussion on ESG timelines and roadmap: challenges and opportunities for SMEs in 2022 on Monday 21 February 2022. The keynote address was given by Katie Power, Policy Coordinator in the Cabinet of Mairead McGuinness, European Commissioner for Financial Stability, Financial Services, and the Capital Markets Union. She highlighted the fact that extreme weather events have brought climate change to the fore of people’s minds and sustainable finance was no longer a niche area, with retail investors showing a strong interest in ESG. The goal is for sustainability reporting to have the equivalent value as financial reporting. The European Commission wants to manage transition risk and ensure that ESG implementation does not move too quickly and in a disorderly fashion. The Commission is proposing mandatory reporting for listed and large SMEs, defined as companies with over 250 employees.
Anne Van den Bergh, Director of Sustainability at Ageas Group, one of Belgium’s leading insurance companies with over $100bn in assets under management, talked about how the conversation has shifted from non-compliance to value creation. Companies are now concerned with creating financial and societal value and becoming a force for good. The insurance industry has developed products that encourage customers to change their behaviour such as switching transport systems to reduce carbon emissions.
James Kiernan from the Chambers Ireland highlighted that there is high awareness of ESG among SMEs but low levels of engagement. There is a greater need to educate SMEs about the importance of ESGs and how they can benefit.
Franc Bogovic, Deputy CEO, Finance and Invest Brussels, shared their investment approach, including turning down projects which exclude sustainability. Investors also look at the culture of an organisation because that has a strong influence on governance. He also made an important distinction between ESGs, which are about risk management, and SDGs, which strive to make positive contributions to the world.
#2 Leverage existing frameworks
The Global Reporting Initiative (GRI) provides a reporting framework and standards that are aligned to the United Nations Sustainable Development Goals (SDGs). These standards suitable for all companies (regardless of size) and industries, and cover a wide range of topics, including energy, water and effluents, Child Labour, Supplier Environmental Assessments, Supplier Social Assessments and Customer Health and Safety.
SMEs can use GRI to decide what to report on and collect the data. For example, Disclosure 302-4 Reduction of energy consumption requires companies to report on the amounts of reduction in energy consumption achieved as a direct result of conservation and efficiency initiatives. Initiatives such as installing motion sensor lighting, turning off monitors at the end of the day, reducing printing (which also saves on paper), can be tracked by using energy bills as most electricity providers now track carbon footprint. The same goes for water consumption disclosures. The utility companies are already doing most of the heavy lifting.
The reality is most SMEs are in a better position, given their quick decision-making processes and small-scale, to implement ESG tracking quicker than corporates. They just didn’t have a reason to do so until now.
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