First, the good news – SMEs are not currently required by law to report on their ESG practices.
Nevertheless, many do report, particularly on their Greenhouse Gas (GGH) emissions, but also on issues such as Modern Slavery and Responsible Sourcing. They do so because their larger customers request this information from them as a result of requirements for reporting on their supply chains.
This can add to the strain, and can be bad news for those already burdened with government red tape. There are some commercial advantages in the process for SMEs, however, if they have the right mindset. If ESG compliance is embraced as part of the organisation’s proactive strategy instead of being viewed as an unnecessary distraction, the positives can be significant.
Proactive ESG engagement showcases resilience, innovation, and good risk management. Employing sustainable policies from the outset is essential for long-term resilience and adaptability. By prioritising sustainable practices, businesses can future-proof their processes, ensuring they can navigate changes and challenges as they evolve. This proactive approach not only strengthens competitiveness but is also preparation for emerging market demands and regulatory requirements. It also has the added benefit of reassuring lenders and investors (particularly as this shows initiative, going beyond what is currently required by regulation).
Another advantage of effective ESG reporting is its crucial role in identifying and addressing risks such as climate change, resource scarcity, and regulatory shifts. By proactively managing these risks, businesses can safeguard their operations and reputation. Additionally, ESG reporting opens up opportunities for growth by enabling companies to focus on higher-margin sectors, ultimately leading to increased profitability and competitive edge. Having a track-record of responding to enquiries about ESG credentials quickly and appropriately will make a business stand out from the crowd.
Good practice can also help attract and retain top talent. Taking a proactive approach to ESG compliance demonstrates that the business has a larger purpose in mind, which is attractive to today’s employees, who are looking for more purpose in their working life than just earning a salary. This can help a business secure the best candidates and retain staff better. In turn, this will also have a positive effect on overall reputation. ESG compliance is particularly beneficial here as it will help strengthen goodwill and credentials within local communities whilst also helping establish ‘purpose’ and create a niche in the market.
Lastly – and on a more practical note – ESG can save money in the medium to long term. Policies that lead to reducing the use of resources increase efficiency, lower environmental impact and, with that, also lower costs, decreasing the risk of fines, and even possibly reducing insurance premiums.
Materiality is important here, however. SMEs often have significantly fewer resources to dedicate to ESG than larger companies, so understanding what is material (ie: relevant and essential for the business) helps direct attention and resources to the most important aspects of ESG for each business. Focus is everything. As the saying goes, ‘to prioritise everything is to prioritise nothing’.
With ESG compliance, the challenge is often determining which of the ‘Environmental,’ ‘Social,’ or ‘Governance’ elements of the framework present the most obstacles for the business, and concentrating efforts there. For instance, a company producing goods—such as in manufacturing, or fashion and textiles—should likely prioritise its environmental impact while placing less emphasis on the social aspects. In contract, a services company—such as a consulting or communications firm—may find that staff diversity and inclusion, along with governance, are the most crucial areas to address.
SMEs can manage the rising demand for ESG reporting by taking a step back and considering the bigger picture. With recent expectations that ESG rules will eventually target SMEs directly, it is more important than ever to re-shift your perspective and highlight that ESG compliance and reporting should be seen as integral to the core strategy. This will enable businesses to recognise the benefits of adopting these practices now as they prepare for what is coming.
