SMEs’ role in the ESG revolution

Future-proofing is a must for all business, big and small

By Paul Kelly

Interest in Environmental, Social and Governance matters is intensifying ahead of November’s COP26. The spotlight’s on the specifics of each criteria, their relationship with business operations and the practicalities of assessment, reporting and auditing. However, headlines tend to focus on large corporations and their journey towards net zero, fairness and control. SMEs cannot afford to believe they’ve been left behind, that whatever they do won’t make a big difference. It will and they must act now.

Small and medium size enterprises, those employing fewer than 250 and with less than £25.9M turnover, are the foundation of our financial system. In the UK, six million SMEs make up 99% of all businesses, employ 61% of workers and generate £2.2 trillion revenue. Globally, the World Bank estimates up to 90% of all businesses are SMEs. As such, their knowledge of ESG issues and approach towards fulfilment of their responsibilities are crucial.

The smaller scale of SMEs might suggest the job of operating sustainably, equitably and within guidelines is comparatively simpler. Their footprints are more modest, their geographical reach typically narrower and fewer employees mean less commuting and travelling. However, the barriers to engagement are numerous. Often, small businesses are so immersed in the day-to-day challenges of running a going concern there’s little time for ‘extracurricular’ matters. They’ll frequently occupy rented premises, which makes efficiency upgrades difficult, and may contract out key functions thus ceding control to a third party. They’ll typically have less buying power to drive down costs of energy, packaging and transport.

Measuring, reporting on and reviewing compliance with ESG metrics requires time and financial resource. Smaller companies are unlikely to have the necessary expertise or dedicated employees. The subject can be confusing and complex and, unlike larger businesses, most SMEs won’t have vast budgets or the benefit of major consultancy guidance to help them meet their ESG obligations.

Despite the difficulties, SMEs must devote as much effort as big corporations to ESG issues. It’s no longer a question of choice, an ‘extracurricular’ matter. Greenbiz’s Joel Makower notes, “As the world moves toward meeting the net-zero targets set by the Paris Agreement, the role of SMEs is gaining increasingly more attention.” Investors not only expect but demand it. As Sam Smith, CEO of finnCap Group, comments, “Sustainability and profitability can – and should – go hand in hand. Funding will increasingly flow to those companies that are meeting urgent environmental and societal needs.”

All finance providers, whether banks or direct investors, want to back sustainable businesses with good investment models. According to EY’s Global Private Equity Survey 2021, around 2/3 of investors consider ESG factors. Inaction could therefore result in lower credit ratings, higher costs of capital and, ultimately, revised investor strategies. With an anticipated $50trillion being invested in sustainable finance markets this year, it’s inevitable investors are increasingly demanding access to non-financial data and proof companies are integrating ESG values into their core business strategies.

Employees and customers are also becoming more demanding about the credentials of companies they’ll give their money to or work for. Having an engaging, accountable culture will increase employee satisfaction, reduce staff turnover and attract new talent. Stakeholders including customers, suppliers and contractors will be assured by robust, responsible risk management practices. Essentially, sustainability embraces much more than environmental endurance; “the business model is the key issue and why ultimately companies should take ESG seriously”, Raymond Greaves, Head of Research at finnCap Group.

A Google search of SME + ESG / climate change / corporate responsibility or variations on the theme produces a bewildering array of results. Where then to start? Having taken the crucial first step of acknowledging action is unavoidable, the good news is that quality advice and useful resources are accessible from trade and industry bodies, governments and ratings agencies. Some examples:

  • UKTN’s five-point action plan; it advises SMEs to create shared purpose through stakeholder engagement and emphasises companies must understand their comparative position in a sector
  • The CBI’s guidance covers emissions, consumption and waste data collection and the establishment of company policies regarding diversity, sustainability and governance, among others
  • Recently-launched, Moody’s ESG Score Predictor provides estimates of scores including environmental, social, governance and carbon emissions for companies including SMEs
  • Exxon Valdez prompted the GRI’s (Global Reporting Initiative) formation in 1997. An independent, international body, it helps businesses and other organisations take responsibility for their impacts by giving them a common language to communicate them. The GRI Standards are the world’s most widely used for sustainability reporting
  • The UK government’s Business Climate Hub links small businesses with tools and resources for measuring and reducing emissions and developing climate strategy

SMEs must overcome numerous challenges on their ESG journey, many due to their size. In some ways, however, their very scale creates as much opportunity as it does difficulty. Without the complexities and bureaucracy often associated with bigger businesses, SMEs can arguably adapt quicker and implement essential new practices more easily and quickly.