It is no secret that climate change is one of the most challenging – and urgent – issues facing humanity today. In recent years, we have seen all corners of society – from regulators and investors to consumers and employees – turn their attention to the business community and scrutinise their role in mitigating, or in some cases contributing to, climate change. This is putting increasing pressure on businesses to proactively measure, report and act on their Environmental, Social and Governance (ESG) credentials.
For the companies that do make a concerted effort to improve their ESG credentials, there are significant benefits to reap. For one, the market is growing rapidly. ESG funds captured $51.1 billion of new money from investors in 2020 – more than double the previous year. A report by McKinsey also highlighted how a strong ESG proposition can help companies attract quality employees, enhance staff motivation, and increase overall productivity.
With big names coming under fire for their lack of ESG data or ‘greenwashing’, it’s easy to assume that smaller companies will remain outside the attention of consumers and regulators. But the reality is that the Small and Medium-sized Enterprises (SMEs) will also need to up their ESG game if they want to remain competitive and compliant.
Times they are changing
ESG has grown in importance, largely driven by changing legal and legislative requirements. The EU has launched its own set regulation known as the Sustainable Finance Disclosure Regulation (SFDR), a green taxonomy for the financial sector with a focus on asset managers which came into effect on March 10th this year. Countries such as Germany have also mandated ESG reporting highlighting how even nations in the EU are taking matters into their own hands and not relying upon overarching guidelines to follow.
In the US, the Biden administration made it clear that reaching net-zero would be one of its priorities in government. Observers foresee that the appointment of Gary Gensler as the new leader of the Securities and Exchanges Committee (SEC) is the first step in the creation of a new green taxonomy by Washington.
Looking closer to home, the United Kingdom is also showing signs of wanting to be a leader in the ESG race to the top following its departure from the EU. It recently became the first country to make the Task Force on Climate-Related Financial Disclosures (TCFD) mandatory. This momentum is unlikely to slow and will inevitably become a growing focus across the world. Unless they act fast, SMEs that have deprioritised ESG will be playing catch up to their larger competitors for years to come.
More than recycling
ESG captures so many areas of the business it can be difficult to know where to start. Businesses can’t rely on ‘gut feel’ when it comes to ESG. It’s vital an organisation knows what the stakeholders care about as well as what data other companies are reporting on. This forms the foundation for an ESG strategy and makes sure the business is providing the most suitable information to its audience.
Even with this focus by governments, investors and consumers, ESG can easily be misinterpreted. It is far more than implementing some environmentally friendly practices in the business. Depending on the guidelines, a company may need to account for the impact their suppliers have on the environment and even the carbon footprint of their individual employees as well.
Let’s not also forget the ‘S’ and ‘G’ in ESG. With the pandemic putting pressure on the lives of many employees, business leaders have paid more focus to the wellbeing and mental health of their staff. Adaptation, flexibility and empathy were key and the companies that translated words to action reaped the benefits – from employee loyalty to brand advocacy. These are also factors that play into the ESG practices and can’t be ignored.
Getting a head start
While most would agree that improving a company’s ESG credentials is the morally correct thing to do, many may wonder why this is now a priority for SMEs. At present, too many time-poor but high-growth SMEs see ESG reporting as expensive and resource-intensive. Without the understanding or knowledge of the various technologies and reporting tools available and their specific functionality, thousands of SMEs are automatically excluding themselves – and investors – from potentially lucrative opportunities.
In the UK, despite contributing £1.6 trillion to the economy and employing over 13 million people, SMEs benefit from no such global standardisation. Instead, they have to comply with national regulations or operate within individual industry standards. It’s likely that SMEs’ experience of ESG regulations will follow this same trajectory. If these businesses don’t make a concerted effort to establish clear ESG guidelines, SMEs will struggle to meet demands from their main stakeholders.
However, ESG is not something for business leaders to fear or avoid. ESG reporting has come leaps and bounds in every way – from affordability and speed to technologies that have the ability to consolidate issues and generate globally compliant sustainability reports. However, challenges arise when a business must decide what frameworks to use and which issues to report on – as well as which priority these issues should be in. Understanding these areas is a journey, and it’s better to start small and evolve over time, rather than commit to too many things and be overwhelmed at the start.
Taking a step-by-step approach rooted in data will improve communication between SMEs and their stakeholders, while also surfacing the ESG metrics that hold genuine value to the business. Those that have the right processes in place will have a greater range of investors drawn to them and secure and maintain public appeal, as well as be prepared for any regulatory change in the future. ESG is not going away, so getting ahead of the curve will stand the company in good stead.