ESG for SMEs: The practical steps
The thoughts of Helene Panzarino, Director, London Institute of Banking & Finance
What might have felt like a feel-good fad that provided a way to wash away corporate sins of the recent past, ESG is here to stay and there is nothing of the flower power of the past about it. Large corporates with deep pockets from all industries are making this a priority, but how does a struggling or scaling SME make a start on playing their role in one of the greatest movements in recent business history?
As an increasing number of business proposals are calling for SMEs to include their company policy on ESG, already burdened but willing SME owners are looking to understand what is being asked of them, to investigate technology that may be able to help fulfil on their objectives, and to work collectively to find solutions that benefit the greater good as well as their own bottom line now and for years to come.
My interest in this topic was sparked during a MoneyLive Nordic Banking Conference when a panel member from an Icelandic Bank told the audience that helping the bank’s SME customers to be more active as regards ESG was more powerful than just having the bank be compliant or innovative in this arena.
The same panel had a representative from the UN who works with banks to help them understand their current position and understand where to make, measure and monitor improvements and progress by starting with a diagnostic of their current practices and attitudes, an actionable set of achievable goals, SMART metrics, and on-going monitoring and support to ensure some tangible benefits. Why not apply the same thinking to SMEs?
What standard to follow?
Many of us are familiar with the UN SDGs (link) and some of us are familiar with the EU taxonomy for ESG (link), and maybe others with the WEF guidelines (link) but while the search for a global standard for taxonomy and regulation continues, decide which current principles apply to your business and industry and are within your (stretch) reach so you can decide the best place to put a stake in the proverbial ground from an operational point of view.
Data from all manner of businesses and organisations can be collected and analysed to help translate lofty goals into strategy and implementation frameworks
Down to basics: what do we mean by ESG?
ESG is essentially a framework to evaluate risk based on environmental, social and governance practices. The theory of sustainable finance or corporate social responsibility is translated into actionable steps that are then communicated, measured and monitored. Data from all manner of businesses and organisations can be collected and analysed to help translate lofty goals into strategy and implementation frameworks that will hold the businesses and owners to account.
Environment – Possibly the basic that feels the most familiar, but is more than just recycling, the E of ESG, might be your company environmental footprint, but also drill down into the detail of how you plan to have more sustainable practices in your wider business stakeholder network, supply chain, energy and other utility consumption, and so on, seeing the good for the environment but also seeing the potential cost savings and appeal to future funders in being more environmentally aware. What’s good for the environment should also be good for your business and your employees.
Social – On a basic level ‘S’ looks at the social interactions, both internally and externally, in your business, both quantitatively and qualitatively, and has a framework of measurable actions that correspond with your goals and practices. Success in this area can have a positive knock on in a variety of areas from employee retention, to a supplier feel good factor, investor interest, attracting a diverse workforce (and advisory board), and so on, all of which make you a more attractive workplace, help to strengthen the bottom line, and add an extra dimension to employee satisfaction that extends beyond the office door.
Governance – This is where managing risk comes into focus and encompasses how a company
Two-thirds of investors consider ESG performance when deciding whether to invest in a business
Some interesting research:
According to the CBI, two-thirds of investors consider ESG performance when deciding whether to invest in a business.
Research by PwC found that over three-quarters of customers would buy from companies that support ESG issues.
It may also help businesses reduce costs and improve profits, with research by McKinsey finding that customers are willing to pay more for greener products and help your business attract and retain employees with research by Anthesis finding that 53% of workers consider an organisation’s sustainability efforts when choosing an organisation to work for.
Some practical steps
Now that we’ve looked at some of the top line of ESG, what can SME owners do to take the first steps on their journey.
People – After making it clear that the process starts at the top of the organisation, identify an internal champion and a build a team that is passionate about ESG, whilst equipping them with the resources and authority required to make a difference.
Lay the foundation for a way of working that speaks to consumer demands, employee passion, supply chain disruption, financial opportunities
Metrics – Decide what to measure – for products, services and processes – and what the benchmarks for your industry look like, and then identify and acquire the data to help you develop a framework and measurement scale. If your industry has clear frontrunners in the ESG race, then you may want to find inspiration in their example. We saw the UN SMART metrics for banks, so something along the SMART lines that matters to your business and the wider standards.
Monitor –progress at regular intervals in order to ensure continued progress but also be aware of changes in certifications, standards, regulations, etc which can add value.
Communicate what you are doing – internally, to customers, to intermediaries, your bank, and to prospects. Be transparent and true to the principles of ESG; don’t sugar coat setbacks, but equally celebrate successes. If you have an annual statement or report, include your efforts in a more formal way.
Finding a way to understand, embrace and execute on the principles of ESG is something that all SMEs would see as a good thing. Finding a way to lay the foundation for a way of working that speaks to consumer demands, employee passion, supply chain disruption, financial opportunities – including attracting investors – in areas of global concern shouldn’t be a difficult path to strengthening the pillars of a sustainable and profitable business model. Help is available from governments, academia, associations, and yes, even from your banks, so for the smart business owner it’s a bit of a no-brainer.
London Institute of Banking & Finance