The changing landscape of ESG for SME’s

ESG and sustainability insights for SMEs

In this series of insights we explore the growing importance of Sustainability and ESG (Environmental Social Governance) reporting, the mandatory regulations that are driving it, and the benefits in SMEs responding positively to it.

Whilst new and emerging ESG legislation will impact directly on the larger corporate entities, those SMEs in their supply chain are being indirectly affected.

For instance, in a recent survey by Lloyds Bank, 77% of the SME manufacturers polled said they are receiving ESG-related requirements from their customers. (Source ESG in Manufacturing Report - Make UK) 

It is therefore important that all businesses, regardless of size, understand the impact and reporting requirements applicable to them and those further up the supplier chain, as this landscape is changing fast.  

For businesses that can adapt and respond positively to these changing circumstances, there are significant opportunities to explore new markets or expand existing ones, both in the private and public sectors. By being agile and innovative, these businesses can position themselves at the forefront of market shifts and technological advancements, thereby creating value for themselves and their stakeholders. 

What is ESG? 

The term ‘sustainability’ is commonly used in the same context as ESG (Environmental Social Governance). 

Whilst sustainability can be defined as development that ‘meets the needs of the present without compromising the ability of future generations to meet their own needs’ (Brundtland Report 1987), ESG is more specific in that it focuses on how businesses can accentuate and monitor key sustainability areas through good governance structures.  

ESG tends to focus on how sustainability factors impact an organisation’s value, not just its impact on the wider environment and society – it can therefore be a useful way to assess direct risks to a business’s bottom line. 

Too often, ESG is seen as a factor of cost and resource rather than something that can be implemented and measured as a return on investment. Indeed, companies are increasingly using and measuring the ‘triple bottom line’ of profit, people, and planet to maintain their focus as much on social and environmental concerns as they do on profits. 

Why is it important? 

Investors, alongside regulators, insurers, lenders, suppliers, customers, and employees, are increasingly demanding information on how sustainability-related risks might impact on business performance and how they are being managed. 

This same group of stakeholders are recognising that transparent and credible ESG data and disclosure is essential to understanding an organisation’s business strategy, purpose, and direction.  

Customers and employees are placing increased pressure on businesses to take positive action on ESG issues. Furthermore, they are not prepared to tolerate ‘greenwashing’ and are demanding credible evidence to back up ESG claims. 

This increasing trend is being primarily driven by two factors – 

• Environmental and social conditions such as climate change, social inequality, cost of living crisis, poverty, and biodiversity loss. 

• International disclosures regulation and legislation, which whilst impacting the larger entities first, is now also affecting those SMEs caught in their supply chain, including those seeking capital, investment, and market opportunities. 

What are the benefits for SMEs? 

The benefits of implementing sustainable ESG practices can be summed up in three areas –

• Recruitment and retention. Labour markets are increasingly tight and competition for the best people is very real. People are looking to work for organisations that share their values and provide workplace policies that support, encourage and provide engaging and fulfilling careers, and that care for their communities and the planet. 

• Customer/consumer demands and loyalty. Demonstrable ESG principles and practices will help businesses attract new customers and build longer lasting and more profitable relationships. It will also open potential new opportunities for the development of goods and services. 

• Improved financial performance. ESG principles encourage good governance across a business, and that has clear links to improved financial performance. Transparency is at the heart of good financial practice.  

Creating value through ESG 

In the short run, the implementation, compliance and reporting of ESG matters is likely to still be considered purely a cost line by many businesses.

However understanding that it can be treated as an investment, with its returns measured by factors such as the price premium payable by investors, the availability of a broader suite of investment options, better performance driven by higher motivation of employees and/or cost savings due to a more sustainable business model can help business owners weigh up how they utilise valuable, and sometimes scarce, resources to drive value within their business. 

If you are interested in understanding more about sustainability and ESG, contact Fleur Lewis, partner and ESG lead, or visit our Responsible Business Hub to discover our latest Bishop Fleming Impact Report. 

In our second insight in this series, we highlight some of the key UK environmental regulations and legislation that are relevant to SMEs.