Covid-19 shook the small business community like never before and despite the financial support that was poured in to keep the economy afloat and support small and medium-sized enterprises (SMEs), an estimated 234,000 UK SMEs permanently ceased trading, and only 56% accessed available government support. However, the end is finally in sight and with cautious optimism, we are seeing the SMEs that survived slowly begin to turn their lights back on.
While many SMEs have had to transform their business over the past eighteen months to include online trading, outdoor premises and enhanced cleaning protocols, a few core things did not change – making money and attracting and retaining customers. There was a time when these business objectives were impacted by things like good customer experience and high margins and while that still matters, there is another powerful force at play that SMEs need to take note of.
Rich Lesser, Boston Consulting Group’s Global CEO, summarised it nicely when he said: “For businesses to thrive in the 2020s, they will need to understand the forces that will shape the next 10 years and use them to their advantage. There’s no doubt that sustainability and societal impact issues will be a leading force for driving value creation.”
The cost and opportunity
To date Environmental, Social and Governance (ESG) has largely been the preserve of big business, until now. Driven by public and investor pressure, the financial and reputational risks of not taking their ESG credentials seriously were too great to ignore for the global giants.
And it turned out to make good business sense as the ones who stepped up have been significantly rewarded. According to a McKinsey study of 2,000 businesses, ESG was found to impact operating profits by as much as 60%, while the companies that made Fortune’s ‘100 Best Companies to Work For’ generated up to 3.8 percent higher stock returns per year than their peers. Being purpose-driven and showing you care pays – but right now it is the world’s largest companies who are reaping the benefits.
So, how can SMEs get a piece of the lucrative pie?
Breaking down the challenge
ESG used to be a ‘nice to have’ but consumers have become more aware, and the spotlight is now turning to the world’s biggest employer – the thriving SME community. There is an increasing expectation that every business, regardless of size, should operate as sustainably as possible and prioritise social value with the same rigor as economic value.
This can feel exposing and has caught out a few businesses for greenwashing or making ‘social good’ claims that don’t stand up to scrutiny. However, with scrutiny comes opportunity. Many SMEs have baked social responsibility into their core strategy but when faced with complex and expensive reporting tools, they have struggled to prove it.
In this piece, we set out the first three steps that SMEs can take to get their ESG wheels in motion.
Speak to your people
Getting your stakeholders on board is the first step – not only so they can see the business taking the process seriously and willing to be held to account, but also to create a shared sense of purpose. Purpose is the bedfellow of productivity, engagement and loyalty so nailing this from the outset will help to achieve other core business objectives.
ESG can feel vague and lofty so getting specific on the goal, outputs and timeline is important. Clear, open and regular communication highlighting ESG reporting as a business priority on par with financial reporting will help to allay fears of greenwashing and encourage conversations within the business outside of management.
And finally, encourage ownership – ESG might sit with one person, but it should not be one person’s responsibility to drive. Everyone should feel engaged and empowered to play their part. Setting up ‘ESG champions’ or creating working groups is a good way to ensure the knowledge – and goal – does not become a ‘do-good’ side project.
Knowledge is power
Once you have your team on board, you can start to look at the broader sector you operate in to understand the material sustainability issues that matter most to your key internal and external stakeholders so you know what to measure and report on. ESG priorities should not be agreed in silos or by the management – it requires a thorough stakeholder mapping and engagement process to ensure the priorities are authentic and relevant.
This can feel like a laborious task but thankfully there are tools that have done the heavy lifting by pooling data from existing sustainability reports to provide insights into the issues that most commonly affect certain industries. This baseline will give SMEs a solid starting point, from which they can carve out the social issues that they have the authority and resources to hone in on.
And finally, once you know which material issues to focus on, you can begin to see how your business currently measures up. There are voluntary frameworks such as the world-renowned Global Reporting Initiative (GRI) which enables businesses to measure a range of ESG issues from carbon emissions to human rights and compliance.
It is worth remembering the data is much more than numbers and reports – its value spans everything from de-risking investment opportunities, enabling SMEs to attract more capital and secure favourable lending terms, to creating business resilience and cementing brand loyalty.
The time is now
People are expecting more from SMEs but they are not expecting them to be perfect. The SMEs that measure their positive impact and share their ESG data voluntarily will be the ones who grab the attention of time-poor consumers, investors and employees.
There is no doubt the business landscape is changing but the forces that Lesser said will shape the next ten years are already here. Smart small business owners should tackle them head-on while they can still be harnessed to help accelerate growth and future proof their business.
By Mark Blick, CEO of Diginex Solutions