Why SMEs shouldn’t ignore ESG concepts

While larger, listed or regulated companies will already have started to implement certain Environmental Social and Governance (ESG) concepts and are already obliged to report on the subject in one form or another, for most SMEs, this is still a somewhat alien concept.

Most business are recovering from the effects of a global pandemic and are having to deal with the economic effects of the Russian invasion of Ukraine, as well as rising inflation. This leaves little room for any company, especially SMEs, to focus on anything other than keeping afloat, however, there is an argument to be made in favour of the introduction of certain ESG concepts by SMEs with the aim of bettering both the workplace and their balance sheets, as well as society in general.

The aim of ESG is sustainability and the measurable promotion of positive contributions to society at large. This may be achieved by business leaders of any company through the implementation of corporate sustainability, social considerations, good governance and care for the environment, within their greater economic plans. This means that while directors should still focus on maximising profitability of the company they serve, they should be aware of the impact their business has on society, as well as the viability of the business in the long run.

Directors and business leaders will have to evaluate the risks, opportunities and challenges that arise from ESG factors. SMEs that are not specifically bound by ESG, are still able to reap the benefits from implementing ESG concepts within their day-to-day operations. Inversely, these same companies may also be subject to negative backlash or negative long-term effects should ESG not be factored in their medium to long term financial plan.

The younger generation of consumers, employees and investors are made up of people with a higher sense of responsibility towards the environment and society. This generation has been bombarded with information regarding environmental issues, social corporate responsibility and equality. It is therefore not uncommon for people to expect more from the companies they work with, the companies they acquire goods and services from and the companies that they invest in. For this reason, companies that embrace ESG and incorporate it into their strategies, business models and overall governance will invariably experience the benefits of this forward-thinking model.

Depending on the industry, companies of any size will benefit from an enhanced reputation and will provide a better customer experience, leading to a greater sense of customer satisfaction and a general improvement of stakeholder relationships. Companies that incorporate ESG as part of their overall strategy may also be better placed at attracting the right persons to form part of their team and retain their employment for longer.

SMEs might also deem ESG as an important consideration when vying for business or establishing relationships with larger companies that are bound to consider ESG factors as part of their overall business strategy.

This implies that a company obliged to carry out ESG-related reporting, such as a listed bank, would factor in ESG considerations when choosing a preferred supplier or business partner, even though said partner is not bound by the same reporting standards.

In fact, larger companies that are ‘burdened’ by such considerations might not always base their decisions solely on financial considerations and will factor in reputation, sustainability and corporate governance into the equation.

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