A Guide to ESG for SMES

ESG stands for “environmental, social, and governance” and refers to a set of standards socially-conscious investors use to screen investments. The concept is becoming increasingly prominent as concerns about the environment, working conditions, and corporate decision-making reach new highs.

This guide explores ESG’s elements in detail before discussing the challenges it poses, solutions, and practical guidance for firms looking to implement various practices associated with it.

Environmental Factors

The “E” in ESG stands for “environment” and relates to an organisation’s sustainability. The lower their impact on the natural world, the higher their ESG score.

Sustainability is not the sole responsibility of multinational firms. SMEs comprise 99.9 per cent of the UK’s private sector businesses, impacting society considerably.

Fortunately, SMEs can take numerous practical steps to reduce their environmental footprint, even if they don’t have extensive access to capital and credit. Options include:

• Using more sustainable materials, such as recycled plastics.
• Sustainably sourcing raw inputs from trusted suppliers.
• Reducing waste by composting or recycling.
• Cutting water consumption by installing more efficient appliances and fixing leaks.
• Switching to energy-efficient appliances and lighting to cut electricity usage.

Various companies have been successful in implementing environmental initiatives. For instance, outdoor clothing brand Patagonia uses sustainable materials and practices in its production processes, while also promoting eco-activism for causes globally.

Meanwhile, UK-based retailer, The Body Shop, invests in sustainable and ethical supply chains to reduce the externalities of sourcing products. It also uses recycled plastics in some of its goods.

Social Factors

The second component of ESG is “S,” which stands for “social responsibility.” Companies that score highly on this metric care for their communities and implement fair labour practices.

Again, SMEs play a vital role in promoting social responsibility. The benefits of doing so include:

• Improved brand reputation that fosters customer loyalty and stronger ties to the community.
• Enhanced employee morale via a workplace culture that promotes ethical conduct and employee wellbeing.
• Reduced turnover from happy and engaged employees.
• Boosted community relations by promoting local sustainability and supporting nearby voluntary work, charities, and organisations.

Online grocery retailer, Abel & Cole, is an excellent example of a company committed to ethical sourcing. The business works closely with suppliers to ensure favourable social and environmental practices.

Lush Cosmetics is another example, known for its commitment to animal welfare. It implements fair labour practices and disallows animal testing internally and for suppliers.

Governance Factors

The “G” in ESG stands for “governance” and relates to the quality of corporate leadership. Companies scoring highly on this metric put various systems and policies in place to ensure they continue to operate ethically on behalf of all stakeholders in a transparent, fair, and accountable manner.

Good governance is essential for SMEs for the following reasons:

• It attracts investors looking for well-run companies to invest in, signalling excellence at the leadership level.
• It improves stakeholder relations, fostering trust among consumers and other businesses in the community, creating opportunities for cooperation and collaboration.

You can improve governance at your business by implementing the following steps:

1. Define your governance structure. Ensure your organisation has a policy encouraging accountability and transparency at all levels.
2. Assess potential risks. Review your organisation for vulnerabilities.
3. Keep communication channels open. Make it possible for low-ranking employees to come forward without fear of reprisals to report wrongdoing and put in processes to allow your employees to suggest ideas and initiatives.
4. Embrace ethical decision-making. Put a code of ethics in place to ensure workers, managers, and leaders know how to respond to various situations.

Challenges and Solutions

SMEs face various challenges in implementing ESG, including trouble integrating new practices within their business models, gaps in internal understanding of how to fulfil mandates and lack of resources to implement changes.

Fortunately, there are resources available to help. These include:

• UK Business Climate Hub – A government-funded organisation that provides SMEs with the resources they need on the journey to net zero.
• The Confederation of British Industry – An industry body that provides additional resources to smaller firms to meet ESG criteria.

Other practical strategies for overcoming ESG challenges include:

• Using ESG data collection and analysis technology to see where the firm is strong and where it is weak.
• Working with other SMEs to deliver ESG benefits at scale, such as working together to support communities.
• Placing employees on training programmes to understand the daily actions they can take to improve the firm’s environmental responsibility and community engagement.

With the above in mind, you can start integrating ESG into your firm by:

• Exploring your existing ESG performance. Ask whether you are performing well against various ESG metrics and see whether you could improve.
• Creating an action plan. Get senior team members together in a room and thrash out the resources, timeline and strategies you need to develop your ESG credentials.
• Embedding ESG into your firm’s operations. Ensure you provide employees with the training they need to carry out your ESG policies.
• Track your progress. Use solutions like Microsoft Power BI to track and monitor your ESG milestones. Leverage feedback to determine which approaches are working and which still require improvement.

Conclusion

Hopefully, you now understand the value of pursuing ESG – regardless of whether you’re a microbusiness or a fast-growing SME.

However, you don’t need to do everything at once. We suggest starting small and integrating ESG into your operations gradually. Slow and steady wins the race.