Today, society has increasing expectations of the role businesses should play in tackling some of the planet’s biggest challenges, such as climate change and social justice issues. Environmental, social and governance is a set of standards measuring a business's impact on society, the environment and how transparent and accountable an organization is. Companies that adhere to ESG principles agree to ethical conduct in those three areas and help to bring about positive change in supply and value chains.
While much of the ESG attention is being paid to large enterprise organizations, small- and- medium- sized businesses (SMBs) have an equal role as global organizations regarding ESG responsibility and playing their part. This article explores five reasons why SMBs should pay attention to ESG matters.
Social attention to sustainability
The general population is growing more concerned and knowledgeable about ESG matters. With that, consumers increasingly aware of climate change and human rights issues want to know the origins and ethics behind the products they buy: where their products come from, who made them, and what materials were used. In short, people want to know the companies they buy from care about doing things the right way and are ethically and sustainably producing products. The ‘E’ and ‘S’ have never been so important.
Companies – no matter the size – make purchase decisions. Authenticity is crucial here – companies need to ensure their ESG efforts are viewed not as ancillary but as fundamental to furthering the company’s mission. ESG efforts should be anchored in the company’s business strategy, ambition, and culture to ensure authenticity. If a company behaves unethically, it may find itself hitting news and media headlines, taking a huge reputational hit.
ESG efforts should be anchored in the company’s business strategy, ambition, and culture to ensure authenticity.
Transparency demand from investors
The attention devoted to ESG matters is rising among new and experienced investors. While occasionally viewed as controversial, investors increasingly perceive ESG as critical to a company's long-term success. Consequently, they frequently demand comprehensive reports regarding ESG before making investment decisions. For instance, companies that thoroughly monitor their supply chains and prioritize production sustainability could benefit from potential business and funding opportunities.
ESG reporting serves as a tool to hold institutions accountable for their operations. It acts as a driving force for positive change, aligning with frameworks such as the UN Sustainable Development Goals. Businesses that excel in ESG factors tend to be more resilient against emerging challenges and enjoy increased stability.
ESG reporting serves as a tool to hold institutions accountable for their operations.
ESG laws
Currently, an overarching piece of legislation covers only some ESG factors worldwide. However, the landscape of ESG compliance and disclosure is complicated and complex, with some regulations being optional and others mandatory for specific ESG factors. Companies must follow laws on certain ESG factors such as code of conduct, bribery, modern slavery and greenhouse gas reporting that demonstrate a commitment to ethical practices. In addition, many new ESG policies and legislation are currently being developed. The following are examples of current ESG legislation across the world.
UK ESG requirements
- Sustainability Disclosure Requirements (SDR) and Investment Labels by Financial Conduct Authority (FCA)
- Diversity and Inclusion on Company Boards and Executive Committees by FCA
- Climate-related Disclosure Requirements by FCA
U.S. ESG requirements
- Climate Disclosures for Public Companies by the Securities and Exchange Commission (SEC)
- California – Climate Corporate Accountability Act (CCAA) by California Secretary of State Office
- Climate-related Financial Risks and Insurers by U.S. Federal Insurance Office (FIO)
EU ESG requirements
- Corporate Sustainability Reporting Directive (CSRD) by European Commission (EC)
Japan ESG requirements
- Mandatory Task Force on Climate-Related Financial Disclosures (TCFD) reporting for prime segment listed companies by regulatory body, Japan Financial Services Agency (FSA)
However, these legal changes to the regulatory landscape are more than just a compliance requirement. They allow businesses to make fundamental choices and changes in how they approach their long-term ESG business strategy. Abiding by new laws and openly communicating their approach to employees and customers shows dedication to doing things right. In addition, it is predicted that ESG laws will become mandatory over time, so SMBs should stay ahead of the curve.
Better financial performance
ESG and overall corporate financial performance share a deep connection. Embracing sustainable and ethical practices enhances a company’s profits. It brings cost-saving benefits, such as going paperless, reducing energy usage, and recycling goods. There are also many instances where ESG principles and disclosure will ultimately help avoid legal fines as more attention is paid to these frameworks and practices. By implementing a comprehensive approach to ESG, companies can effectively address rising operational expenses and create a more sustainable business.
Moreover, as previously highlighted, customers are likelier to engage and buy from business that prioritize ESG issues such as sustainability and diversity, equity and inclusion. Those companies that take their strategies to a higher level tend to outperform their competitors significantly.
By implementing a comprehensive approach to ESG, companies can effectively address rising operational expenses and create a more sustainable business.
ESG practices are the right thing to do
As global challenges like COVID-19, climate change, supply chain issues, and economic inequality force leaders to rethink how business is done, it’s clear that traditional profit maximization methods are no longer sufficient.
Instead, businesses from SMB to large enterprise need new strategies that will drive equitable growth and long-term prosperity that protects and preserves the environment and focuses on a sustainable future. It is not only better for the bottom line for companies to be invested in sustainability and ethical practices, but it is also their moral duty. How businesses operate sets a considerable standard and influences the rest of society in acting on environmental, social and governance issues.
To learn more about how NAVEX ONE solutions can help your company’s ESG goals and challenges, click here.
For more information on how to get started with a comprehensive ESG program, download the
Frequently Asked Questions (FAQ)
1. What does ESG stand for, and why is it important for SMBs?
ESG stands for environmental, social and governance, and it acts as a framework for evaluating a company's impact on those three elements. For SMBs, ESG is vital because it enhances transparency, builds trust with stakeholders and aligns with societal expectations, ultimately boosting reputation and sustainability.
2. Are ESG efforts only relevant for larger corporations, or can SMBs benefit too?
ESG principles are relevant to businesses of all sizes, including SMBs. In fact, SMBs can experience significant benefits from embracing ESG practices, such as gaining a competitive edge, attracting investors and improving financial performance.
3. How can SMBs ensure authenticity in their ESG efforts?
Authenticity in ESG efforts can be achieved by integrating ESG principles into the company's mission and business strategy. ESG should be more than a checkbox; it should be ingrained in the company's culture, creating a genuine commitment to ethical practices.
4. What is the connection between ESG and financial performance for SMBs?
Embracing ESG principles often leads to improved financial performance for SMBs. Sustainability practices reduce costs (e.g., energy consumption and legal fines) and appeal to consumers who prioritize ethical business practices, potentially leading to increased sales and profitability.
5. How should SMBs navigate the complex landscape of ESG laws and regulations?
SMBs should stay informed about evolving ESG laws and ensure compliance with regulations related to their industry and location. Compliance demonstrates a commitment to ethical practices and prepares SMBs for mandatory ESG laws in the future.
6. Where can SMBs find guidance and resources to start their ESG journey?
SMBs can find valuable resources from ESG-focused organizations, industry associations, and ESG consultants. They can also explore comprehensive guides and tools, such as NAVEX’s Definitive Guide to ESG to kickstart their ESG program.
