Some say that ‘ESG’ today is similar to what ‘Big Data’ used to be few years ago. Everybody is talking about it, but nobody knows exactly what it means.
Obviously, this is not true for large corporations and for the financial sector anymore. They are getting increasingly familiar with Environmental, Social and Governance (ESG) aspects and how they are relevant to businesses. This includes understanding what ESG means in daily life, and exploring how it can bring benefits. They also start to differentiate corporate sustainability from ESG.
There is however one large group of companies which are still in trouble when it comes to what ESG exactly means and what they should do to ‘improve their ESG performance’. These are the small and medium size companies, or SMEs.
Things that everybody keeps talking about when it comes to ESG, such as ‘green bonds’, ‘ESG ratings’, ‘sustainability reports’ seem to be irrelevant to them. This also means that if SMEs want to advance with ESG and they simply try to copy big companies then they will most probably fail. The reasons for this is twofold: on one hand they will invest a lot of energy and resources in doing ‘traditional’ ESG tasks such as writing ESG or sustainability reports. And on the other hand they will get very little in return from their stakeholders for these time consuming tasks.
So in this article we tried to summarize what SMEs should do if they want to start with ESG?
The starting point is to clarify what ESG means. In our definition it is the part of sustainability that has a business relevance. Two things can make something relevant from a business point of view: if business partners are interested in it, or if it has a clear financial or business impact.
If we are looking at ESG from this angle, we can clearly define actions that are relevant even for smaller companies that want to do something with ESG.
- Fix the basics: one mistake that SMEs can often make is to try to focus on sustainability trends and still having missing processes. Introducing a greener product is great but not credible as long as your environmental permit or basic safety procedures are missing. Do not forget that the first thing your business partners will ask for is not if you have a sustainability report but if you have your basic certifications.
- Benchmark: understanding what peers or similar companies are doing is always helpful. For SMEs benchmarks will most probably reveal that others are not very advanced with ESG either. However, it will probably also identify a few points where the peers are more advanced. Understanding these can prevent being left behind competition. Prepare benchmark and it will help you both in defining your ambition and drawing up next steps.
- Understand your stakeholders: the term Environmental Social and Governance was originally introduced by the financial sector. But financial sector is rather focusing on larger companies as for now. On the other hand for large companies supply chains are particularly important in realizing their sustainability policies and actions. So currently for SMEs customers will be in most cases more relevant than investors or banks. When selecting your most important stakeholders as an SME, customer expectations will be probably more interesting and relevant than banks or investors.
- Plan actions: action plans are essential parts of strategies. Preparing an action plan the focus should be on the most important topics. This is especially relevant for small companies. For example social aspects are important. But if you only have a few employees then introducing a corporate volunteering program should probably not be your first action. You should rather focus on your products, to have a green value offering. Or get some certifications that your customers want. An action plan should not be long. Plan 5-10 relevant and impactful actions with a realistic timeline. Do not forget that ESG is about business. So your actions should have a positive impact and business benefit at the same time.
- Be transparent: corporate sustainability started with reporting, and transparency is still the backbone of sustainability and ESG. But for an SME writing hundred pages long reports does not make any sense. Honestly, it does not make sense for large companies either. You should still make sure to collect your basic non-financial performance data related to employees, environmental performance, or suppliers. When selecting the indicators, use rather common sense and stakeholder expectations. External guidelines can give a good direction but can also give confusion with their dozens (if not hundreds) of indicators. Most of which are not relevant for SMEs anyway. Once you have your data it is great if you can summarize it in a few pages or on a website. This will increase the trust of your stakeholders.
+1 Work on culture: the final but most important point. ESG is not an administrative task. It is only credible if you walk the talk. ESG thinking must be incorporated in all the activities and decisions of your company. Leaders as well as employees should always ask if what they are doing is really sustainable? Or how it can be made more sustainable? Sustainability culture and ESG mindset can only come from the owners or from top managers and has to be cascaded down to all levels in the organization. Once ESG is taken seriously on all levels, performance improvement will follow too.
Cover picture: depositphotos.com