• Avinder Laroya

ESG: A Challenge For SMEs, a Legal Risk, Or a Business Opportunity?



This article will discuss the environmental, social and governance issues facing all businesses. We will focus on the challenges and opportunities for the SME sector and provide some useful suggestions on how to implement the changes in this article.


Whether giant industries, SMEs, or startups, businesses play a crucial role in defining a country’s economy. They also address the major social and environmental issues faced by society. As we step foot into the new world on the path to recovering from the COVID 19 pandemic, the impacts and challenges of sustainability are more significant than ever.


Tackling environmental and social inequalities is an issue for all businesses, SMEs are under a perpetual challenge to support these issues. More than 50% of the UK’s economy is dependent on SMEs. Therefore, this sector is important in identifying the emerging problems and make specific contributions to monitor these issues.


ESG practices can undoubtedly play their role in the betterment of businesses. Taking account of environmental, social, and governance factors is crucial for SMEs.


What is ESG?


Environmental, Social, and Governance (ESG) focuses on three key factors when measuring the sustainability and ethical impact of an investment in a business or company. The Environmental Social and Governance factors are a subset of non-financial performance indicators which include ethical, sustainable, and corporate governance. Systems are put in place to ensure accountability and managing a corporation’s carbon footprint.


ESG requires a comprehensive evaluation of a business to determine how it serves the stakeholders within and outside the organisation. It also factors in the environment where it has an influence. However, the relative focus on ESG is subjective and varies from company and sector.


Environmental


The focus on environmental factors includes the examination of how a business performs with waste and pollution, resource depletion, greenhouse gas emissions, deforestation, and climate change. A business should look into their conservation efforts, use of natural resources and the sustainability, through recycling.


Social


The social criteria looks at how the company treats it’s people and looks into employee relations and diversity, working conditions, including modern day slavery and child labour. How local communities are impacted by the business and any projects to serve poor an underserved communities globally, health and safety and conflict management.


Social issues revolve around evaluating the company’s diversity and inclusion efforts spread across entry-level to boardroom employees. The work environment and wellness programs should be reviewed to ensure employees are treated fairly without discrimination or harassment. Addressing the social issues makes a substantial social impact and makes the world a better, safer, and more just place with equal opportunities so all can thrive.


Governance


Governance examines how a corporation governs itself and focuses on tax, executive remuneration, donations and political lobbying, corruption and bribery, board diversity and structure.


Governance is focused on a company’s management and leadership and how companies make a positive impact under the managements and leadership’s guidance. Governance includes a boards composition, director independence, board evaluation, succession planning and is focused on equity in compensation, integrity, and transparency with other stakeholders. It also includes evaluating the board, executives, and management for inclusion and diversity.


Why is ESG Important?


ESG is important for industry and society as it addresses issues such as climate change, resource scarcity and social inequality that impact its ability to function effectively. Having a ESG policy also make companies attractive for investment and to end consumers who seek consciously and sustainable aware companies.


ESG presents a company with more opportunities for good business rather than presenting a risk. Hence, companies must use their resources and play their part in making the world a better place. For instance, conserving energy, using renewable energy, and recycling can significantly minimise the costs while helping the environment. A diverse workforce where employees are valued and treated equally attracts top talent, reduces employee turnover, and boosts employee morale.


Investors and consumers value ESG more than companies believe. Oftentimes, companies are bypassed only because they do not emphasise ESG protocols. Most importantly, Gen Z is entering adulthood, and this generation is the most diverse ever. Addressing climate change, social justice, and equity are crucial. Furthermore, now that Millennials and the Gen Z are becoming important stakeholders, companies that do not pay much heed to ESG initiatives are doomed to fail.


The World Economic Forum states that out of the top 10 global risks to businesses, 8 of them are ESG-related. Additionally, as per McKinsey & Company, ESG can significantly improve the bottom line. It can direct a company to newer business opportunities, and markets and consumers would be more likely to seek companies dedicated to ESG.


An ESG program assists a company in futureproofing its processes by anticipating changes such as bans on plastic bags and carbon credits. Conservation efforts can also help with cost savings in energy costs.


Furthermore, employees treated well in their workplace free of discrimination and harassment are likely to become more productive and stay dedicated to their jobs. On the contrary, unfair treatment will cause the employees to leave and, in worst-case scenarios, file regulatory complaints.


The SME Advantage


SME’s may have an advantage over larger companies as they are more agile and can make decisions faster and move quicker than larger corporations to implement changes.


SME’s are also often closer to their customers and tend to be located near to the communities they serve. The changes can also be made painlessly through moving to digital solutions, using recycled or compostable packaging, improving waste management and energy efficiency.


The Process of Developing an ESG Strategy


Below are some practical steps to consider when developing an ESG plan.


Self-reflection is the first step in developing an ESG program. All businesses need to ask difficult questions, such as:


  1. Does the company use natural resources and renewable energy sources while conserving water? Does the company promote recycling and purchasing recycled goods? What is the company’s carbon footprint? Do the company’s operations adversely affect the land, water, and life?

  2. Does the company promote diversity and inclusion of employees at all levels? Is the company making any active efforts to recruit a diverse workforce? Is the company free from harassment and discrimination? Does the company have a suitable complaints procedure for internal and external issues? Are there suitable measures to foster the employees’ mental and physical well-being? Are employees treated fairly?

  3. Are the leadership and management transparent in dealings with stakeholders, customers, vendors, employees, and investors? Is the business operating in compliance with governmental regulations? Does the company meet the requirements of equal opportunities, wage hours, environment, and ethics?

Once a business determines the areas requiring improvement, it should build strategies to address these areas. Then, these strategies should be incorporated into the business operations.


Key Elements of an ESG Strategy



The elements of an ESG strategy depends on a company's industry and business requirements. However, some components should be present in all strategies.


360-Degree Engagement


A successful ESG strategy must include all stakeholders, including the board, executives, staff, consumers, and investors. The business should also seek investor and customer input to improve the processes.


Address All 3 ESG Components


Maintaining balance is critical to an effective ESG strategy. Many businesses find it easier to implement one or two strategies that suit them the best and neglect the other(s). For instance, a workforce dominated by one culture might find it challenging to recruit and retain a diverse workforce. However, if a business does not pay equal attention to all three components, it can never build an effective strategy.


Top to Botton Education & Commitment


All business personnel, from board to entry-level employees, should be trained on the company’s ESG policy and strategy. Once the staff are trained, the company should commit to put into place the strategy. ESG should always be considered when negotiating and making business decisions with third parties and entering into new agreements.


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