ESG stands for Environmental, Social, and Governance. Here is my explanation of ESG for SMEs & why it matters for small businesses including some resources for further reading.
According to a recent webinar with the IoD, there are changes coming that will bring small to medium enterprises in line with bigger business reporting practices. So be prepared, ESG is potentially on its way to us all, make ESG your USP.
To find out more about the upcoming companies’ house reforms and how they may impact your business see this report here from ICAEW.
Environmental, Social and Governance (ESG) is a framework used to evaluate the sustainability and ethical impact of a company’s operations and practices. In plain English, ESG represents a set of criteria that assess how well a company is managing its environmental impact, addressing social issues, and maintaining good corporate governance.
Environmental Social & Governance (ESG) for SMEs
Here’s a breakdown of each individual component:
- Environmental: This refers to a company’s impact on the natural environment. It includes factors such as carbon emissions, resource usage, waste management, and the company’s efforts to mitigate environmental risks.
- Social: This focuses on a company’s relationship with its stakeholders, including employees, customers, suppliers, and the communities it operates in. It involves considerations such as fair labour practices, diversity and inclusion, human rights, consumer protection, and community engagement.
- Governance: This relates to how a company is managed, including its internal controls, board structure, executive compensation, transparency, and accountability. Good management ensures that the company is effectively managed and operates with integrity.
Five reasons SMEs should embrace Environmental, Social & Governance (ESG)
- Enhanced Reputation: Embracing ESG practices can improve a company’s reputation and brand image. Consumers and investors are increasingly conscious of sustainability and ethical issues and prefer supporting businesses that align with their values. By demonstrating a commitment to ESG, SMEs can build trust and attract more customers and investors.
- Access to Capital: Many investors, including institutional investors and impact-focused funds, consider ESG factors when making investment decisions. By incorporating ESG practices, SMEs can broaden their access to capital and attract investment opportunities that align with their values.
- Risk Management: ESG factors can help SMEs identify and mitigate potential risks. Environmental risks, such as climate change and resource scarcity, can impact business operations and supply chains. Social risks, such as labour issues or negative community perceptions, can also affect business continuity. By addressing these risks proactively, SMEs can minimise disruptions and ensure long-term resilience.
- Cost Savings and Efficiency: Embracing sustainability measures can lead to cost savings and operational efficiencies. For example, implementing energy-efficient practices can reduce utility expenses, adopting waste reduction strategies can lower disposal costs, and promoting employee well-being can improve productivity and reduce turnover.
- Regulatory Compliance: Governments worldwide are increasingly imposing stricter regulations related to environmental and social issues. By adopting ESG practices early on, SMEs can stay ahead of regulatory requirements and avoid potential penalties or legal issues.
Overall, embracing ESG allows SMEs to align with societal expectations, improve competitiveness, and contribute to a more sustainable and inclusive future. It is not only beneficial from a moral standpoint but also makes good business sense in today’s evolving economic landscape. It may also be worth considering hiring a non-executive director for your small business, find out why you should hire a NED in our other article here.
Seven ESG Resources for UK SMEs for further reading
Here are seven ESG resources specifically targeted at SMEs in the UK along with their websites (links current at the time of writing):
- UK Sustainable Investment and Finance Association (UKSIF): UKSIF is a membership organisation promoting sustainable investment and finance in the UK. They provide resources, reports, and guidance on ESG for SMEs.
- Small Business Charter (SBC): SBC is a national accreditation awarded to business schools and programs that support small businesses and SMEs. They offer resources on various business aspects, including sustainability and responsible business practices.
- The Department for Business, Energy and Industrial Strategy (BEIS): BEIS is a Government department that focuses on business, energy, and industrial strategy. They provide guidance and resources on sustainable business practices and environmental regulations.
- The Carbon Trust: The Carbon Trust is an organization that provides expert advice, services, and certifications to help businesses reduce their carbon footprint and improve resource efficiency. They offer guidance specifically tailored for SMEs.
- The Confederation of British Industry (CBI): CBI is a business lobbying organization in the UK. They offer resources and guidance on responsible business practices, including ESG considerations, for SMEs.
- Business in the Community (BITC): BITC is a business-led membership organization that promotes responsible business practices. They provide tools, resources, and case studies on sustainability and social responsibility for SMEs.
- UK Government’s ESG Reporting Requirements: The UK government has introduced reporting requirements for certain companies to disclose their environmental and social impacts. The government’s official website provides information on these requirements and guidance on ESG reporting.
Remember to visit each website for comprehensive information, and additional resources, and to stay up to date with any updates or changes in ESG practices for SMEs in the UK.
ESG is going to require ongoing maintenance to ensure you are reaching your targets, look to hire an independent director for your business to ensure you stay on track.
Here is the UK Business Banks’ guidance on how to implement ESG in your business.