ESG Demystified: How SMEs Can Incorporate ESG Principles into their Business

In today’s age, businesses are increasingly expected to think not only about the bottom line, but also about creating value for their stakeholders like employees, suppliers, customers and communities.

In today’s age, businesses are increasingly expected to think not only about the bottom line, but also about creating value for their stakeholders like employees, suppliers, customers and communities. The value of social capital can no longer be underestimated. This serves as an impetus for adopting Environmental and Social Governance (ESG). 

The recent acceleration in ESG has been driven by a number of factors, namely the heightened social, and governmental focus on the broader impact of businesses, beyond their financial implications. There is now a clear link between the recognition of ESG factors and a business’s long-term success. Research shows that businesses concerned with ESG experience fewer downside risks and increased value creation. 

McKinsey reported that ESG frameworks can help create value for your business in the following ways: 

• Reducing costs; 
• Minimising regulatory intervention; 
• Increasing productivity and attracting top talent; 
• Enhanced reputation and trust; 
• Mitigating risks; and 
• Providing a competitive advantage.  

ESG Explained 

ESG is a useful framework that is now being increasingly used to evaluate the sustainable and ethical impacts of the business. The advantages of utilising ESG frameworks should not be limited to large corporations alone, SMEs should begin exploring ways of incorporating ESG to drive their businesses forward. In this article, we provide a simplified guide to understanding and integrating ESG into your business’s operations. Firstly, we will break down the individual components of ESG. 

 

Environmental: This involves practices that contribute to environmental sustainability and evaluating the relationship between a business and the natural environment. This is a broad umbrella that covers everything from the energy a business consumes and waste it discharges. For SMEs, this could mean reducing waste, improving energy efficiency, mapping out carbon emissions or sourcing materials sustainably. 

Social: This concerns the relationship a business fosters with the stakeholders in the communities it does business in. This includes a business’s relationships with employees, suppliers, customers, and communities. For SMEs, this may involve fostering a positive workplace culture, ensuring fair labour practices, and engaging in local community outreach. 

Governance: This encompasses all matters pertaining to the internal system of practices, policies, controls, and procedures of a business. For SMEs, this should involve transparency, effective leadership, compliance, risk management and ensuring policies are in place to ensure good governance.  

Steps for SMEs to Incorporate ESG 

SMEs looking to stay ahead of the curve, should consider adopting ESG principles into their day-to-day operations. Below are six simple steps that businesses can take to incorporate ESG. 

1. Conduct an Assessment of Current Practices: Start by evaluating the current environmental footprint, social, and governance practices and identify areas for improvement. For example, taking into consideration the business’ energy usage, how it interacts with the community it functions in, and establishing its internal governance structure and compliance levels. 
2. Engage Stakeholders: Involve employees, customers, suppliers, and community members in your ESG journey. Their input can provide valuable insights that could help improve your business and foster a sense of ownership. 
3. Set Clear Objectives: Define specific, measurable, achievable, relevant, and time-bound (SMART) ESG goals. This might include improving resource efficiency, improving employee welfare, or enhancing governance policies. 
4. Implement Changes: Start with small, manageable initiatives. For example, switch to energy-efficient lighting, implement a flexible working policy, or establish an advisory board. 
5. Monitor and Report: Regularly track progress towards ESG goals. Transparency is key, so consider publishing an annual ESG report to communicate achievements and ongoing efforts to stakeholders. This will also make your business more attractive to potential investors in the long term and serve as evidence to stakeholders. 
6. Continuous Improvement: ESG is an ongoing commitment. Regularly review and update your ESG practices to adapt to new challenges and opportunities as the world and climate evolves. For example, turning to sustainable financing opportunities where investors specifically seek companies that place sustainability at their forefront. 

Practical ways SME’s can implement ESG Practices  

Environmental Practices 

• Upgrade to energy-efficient lighting and appliances. 
• Source materials from suppliers that follow sustainable practices. 
• Use recycled or eco-friendly materials where possible. 
• Implement a recycling program in the workplace. 
• Reduce paper usage by digitizing documents and processes. 
• Implement water recycling systems in production processes. 

Social Practices 

• Promote diversity in hiring and create an inclusive workplace culture. 
• Offer competitive wages and benefits. 
• Provide opportunities for professional development and training. 
• Ensure a safe and healthy work environment. 
• Support community projects and charity organisations. 
• Provide high-quality, safe, and sustainable products and services. 

Governance Practices 

• Implement a code of ethics for all employees. 
• Ensure transparency in financial reporting and business operations. 
• Implement policies including data protection and privacy policy , HR policies , cyber security policy , anti-corruption and anti-bribery policy ,  
• Ensure compliance with all relevant laws and regulations. 
• Integrate ESG criteria into the company’s strategy. 

Conclusion 

SMEs can reap substantial benefits from adopting sustainable and ethical practices. By starting small and focusing on continuous improvement, SMEs can build a resilient business that contributes positively to society and the environment while enhancing their competitive edge. The ESG Pillars serve as a useful framework that if utilised effectively can add value. For further insight on how your business can embrace ESG, consult us at law@cmsmeclub.com . 

Useful Resources: 

UN Global Impact: The SME Guide to Corporate Sustainability 

ESG, An Employment Perspective 

Small Business, Big Impact 

Contact Persons & Contributors 

Cherono Barno

 

Published on Aug. 22, 2024, 1:10 p.m.