Small Businesses Will Have the Biggest Impact on ESG

DigitalCFO Newsroom | 5 September 2022

Many large corporations are faced with increasing pressure from stakeholders and investors to integrate environmental, social and governance (ESG) reporting.

Due to a surge in conscious consumerism driven by the COVID-19 pandemic, many large corporations are faced with increasing pressure from stakeholders and investors to integrate environmental, social and governance (ESG) reporting into their practices and business models. While this has been a recent trend among many MNCs, however, MBH recognises that it is in fact small and medium companies, ones that have already been active in ESG for some time, who are the ones who can shape the future of sustainability.

ESG focuses on the protection of the environment, social justice and long-term economic prosperity, and it has gained a greater importance among investors, policymakers and other key stakeholders because it is seen as a way to safeguard businesses from future risks. Because of this, many businesses today are faced with increasing pressure to integrate ESG reporting from multiple stakeholders. A recent poll by Edelman (link below) showed that 88% of institutional investors put ESG on par with operational and financial considerations when making investment decisions.

Small Companies, Big Differences

While many of the world’s biggest corporations are now committing to shifting their practices to address the ESG wave, it is the small and medium enterprises that will make the real difference.

Callum Laing, CEO, MBH Corporation plc said, “Small businesses – including the ones that MBH partners with – have long been leading the way when it comes to ESG and because they are such an important part of the business ecosystem, SMEs are the ones who will make the biggest impact.”

SMEs make up 90% of all global companies, contribute to roughly 70% of employment worldwide and 52% of turnover. SMEs also drive up to 70% of the global GDP, which makes them very important for economic growth. Affecting a change in sustainability that really makes a difference is therefore practically impossible without the cooperation of small businesses. Luckily, small businesses have plenty of incentive to get onboard.

Studies have shown that one of the most important motivations for SMEs to become sustainable has been cost reduction, which is understandable after two years of exceptional volatility due to the COVID pandemic. As the business world navigates through multiple crises, it is reasonable that cost reduction would become a priority and making a business more sustainable does come with financial benefits. Take, for example, the lighting in an office building. In some instances, traditional lighting can account for 25% of the energy consumption, but by switching to more sustainable LED lighting, a business can save over 90% of its original consumption, which is plenty of incentive for an entrepreneur to embrace sustainability.

Importance of ESG

There is no question that the ESG movement is gaining momentum. In the UK, section 172 of the Companies Act 2006 (CA2006) requires bigger companies to complete a section 172 statement for their annual reports and while this does not yet affect SMEs, it does reflect the increasing importance of ESG and the focus on regulation of environmental and social impact on the business level.

This is further emphasised by the focus that is being placed on helping businesses become more ESG compliant. In the UK, almost £5 billion of funding is available to help organisations become greener as part of the government’s commitment to reach net zero emissions by 2050. In Asia, countries like Singapore provide government supported programmes to educate SMEs on ESG essentials, allowing them to gain better insight into sustainability initiatives, and how to capture new opportunities in the green economy.

SMEs Are Leading the Way

Some SMEs are already ahead of the curve, as recent research by the World Economic Forum (link below) has shown that most future-ready SMEs have managed to leverage the opportunities that come with a clear and measurable focus on social and environmental sustainability. Asides from offering routes to address some of the highest-ranked challenges that SMEs face, such as growth and expansion, talent acquisition and funding, it also offers an opportunity to gain reputational benefits as champions of sustainable strategies.

However, with all the resources that are now available, SME’s that are not as advanced in ESG are still not likely to miss out. According to a report by Eevery, an organisation that helps small businesses improve their sustainability and become more socially responsible, in the past year, SMEs in the UK have invested an average of £61,250 in sustainability operations and are planning to spend a further £78,392 in the coming year. This 27% increase shows not only the rising importance of sustainability, but also the need to stay ahead of the curve as sustainability creates a new space for competition, one that SMEs are poised to take advantage of.