Are you ready to dive into the world of ESG excellence for SMEs and contribute to a sustainable future for future generations? Over a series of articles, we’ll take you on a journey to explore the meaning of ESG and its importance for SMEs. You’ll learn how to successfully integrate ESG principles, measure and track key ESG metrics, and tackle ESG-related challenges in your business operations. In addition, we’ll discuss why ESG has become critical to investors and financiers and what they look for, so you can secure the capital you need to navigate a dynamic business landscape that’s transitioning towards sustainability.
This first article will provide you with a general overview of ESG as a perspective, its importance for businesses, and the ways in which SMEs can integrate ESG as a practice to foster sustainable and successful operations.
What is ESG?
ESG refers to Environmental, Social and Governance matters that have an impact on or are impacted by a company’s operations. ESG helps us understand how a company performs in terms of the environment, society, and corporate governance, as well as the consequences for its business of developments in those areas. ESG should not be approached as a theoretical concept, but rather as a set of three related perspectives to guide businesses in practice:
- Environmental (E) issues through which business can minimize their environmental impact, conserve natural resources, and protect biodiversity.
- Social (S) issues through which business can take care of their employees’ wellbeing, human rights, diversity and equality, community engagement, and occupational and product safety.
- Governance (G) issues through which business can make transparent their management structures and decision-making process, reduce governance risk, uphold ethical practices, and build trust among stakeholders.
Why does ESG matter in business?
While the term goes back further, ESG gained traction after the 2008 financial crisis, when many trillions of dollars in assets were wiped out. The world’s economic leaders saw ESG as a way to avoid similar devastating impacts to the world economy in the future. While it was therefore initially focused on assessing external risks to companies and the implications for investors and financiers, more enlightened recent approaches to ESG require businesses to report on their own impact on the world around them. This approach, known as “double materiality”, is a key concept for excellence in ESG and something we’ll explore in a later article.
Consequently, ESG considerations have become increasingly crucial in the business world. Businesses that embrace ESG issues are not only contributing to a more sustainable future but also gaining a competitive edge in the market. Investors are also increasingly incorporating ESG considerations into their investment decisions.
While larger and corporate companies are legally bound to report on their ESG performance (for example according to the CSRD roadmap within the EU) SMEs can proactively embrace ESG issues for sustainable business practice. Aligning ESG with business values can benefit your business, employees, customers, community and our planet in the end.
Here are some insights according to studies on why ESG matters and how ESG practices benefits SMEs as well;
Reduce and manage business risk efficiently
The World Economic Forum‘s 2022 Global Risks Report highlights the pervasive risks businesses face, ranging from climate change and social unrest to governance failures. Integrating ESG principles into business operations enables companies to proactively identify and manage these risks, bolstering their long-term resilience.
Build stakeholder trust and business reputation
The Edelman Trust Barometer consistently emphasize the importance of trust in business. ESG practices contribute to building and maintaining trust among stakeholders, including customers, employees, investors, and the wider community. The Harvard Business Review also revealed a positive correlation between strong ESG performance and higher levels of trust.
Lead business to be aligned with regulatory compliance
With increasing global awareness of environmental and social issues, governments and regulatory bodies are implementing stricter guidelines. According to the OECD study, companies that align with ESG principles are better positioned to comply with existing and future regulations, reducing legal and regulatory risks.
Better access to capital and attract investors
Numerous studies, including Harvard Business Review showed that companies with strong ESG performance often have better access to capital. Investors are increasingly considering ESG criteria when making investment decisions, and companies with robust ESG practices may attract a broader range of investors and benefit from lower capital costs.
Drive innovation and efficient business practices
ESG considerations drive companies to innovate and adopt more sustainable and efficient business practices. A study by Rockefeller Asset Management found a positive relationship between ESG performance and innovation and efficiency. Companies that prioritize ESG are more likely to invest in environmentally friendly technologies and processes, which can lead to cost savings and improved operational efficiency.
Engage employees more with business productivity
The study conducted by Gallup found that employees are more engaged when they believe their company is committed to environmental and social responsibility. Companies with strong ESG practices can attract and retain top talent, leading to increased productivity and employee satisfaction.
Create long-term value for business
McKinsey & Company’s study shows that ESG-focused companies consistently outperform their peers. Embracing ESG is not just a moral obligation but a strategic necessity for long-term success. Companies that prioritize ESG principles can better mitigate risks, enhance trust, attract investments, drive innovation, and generate sustained value for all stakeholders. By addressing environmental and social challenges responsibly, companies contribute to sustainable development while creating value for both shareholders and society.
