Currently, only larger businesses are legally required to report on their environmental, social, and governance (ESG) practices. Nevertheless, this can have a significant knock-on effect on SMEs, which often must conduct their own reporting to meet the demands of their larger clients who need to report ESG compliance in their supply chains. SMEs have fewer resources to meet these demands, however. Adding ESG reporting to an already significant burden of legal and regulatory requirements can create a significant headache and threaten to drain precious management time. The key is to see past the pain of this new reporting regime to the positive benefits it can bring to a business. Don’t regard it as an unhelpful distraction from the focus of the business. Tom Otley, Director at Oury Clark Sustainability looks at how ESG reporting can power a company’s positive forward drive, help in seeking new opportunities and positioning the business to best advantage to secure them.
Taking a positive approach to ESG compliance and reporting can:
- Save money. Reducing the use of resources not only has the potential to cut costs significantly, but also to lessen environmental impacts, in turn decreasing the risk of triggering expensive fines and in turn lowering insurance premiums.
- Position the business perfectly for big business clients. The benefit is not just about keeping one big customer happy, by responding to their request to help their supply chain statistics. The bigger picture is that once an SME has gone through this pain, they are able to respond far more quickly to future enquiries about ESG credentials, creating a competitive advantage and opening up opportunity new contracts down the line – and growth.
- Satisfy potential lenders and investors. For an SME, not required by law at this stage to report on its ESG practices, engaging with the process demonstrates a forward-thinking, best-practice approach that will be attractive to potential lenders and investors, underlining their resilience, innovation and good risk management practices.
- Attract and retain the best employees and management. In the race for talent, businesses with ‘purpose’, that provide more to their people over and above just a salary, have been shown to be winners, snaring the better candidates and enjoying lower staff turnover rates.
- Improve a company’s reputation and community engagement. ESG compliance will drive stronger ties with local communities and stakeholders and generate significant goodwill. All this is good for business.
For SMEs with more limited resources to devote to ESG compliance compared to larger customers and clients, the magic word is ‘materiality’. This is the principle of defining the topics that matter most to your business and your stakeholders. As the old adage goes, ‘to prioritise everything is to prioritise nothing’. With ESG, the key is to work out which of the ‘Environmental, ‘Social’ and ‘Governance’ aspects are most important. For example, for a services business – perhaps a consulting or communications company, or similar – it will probably be issues around diversity and inclusion of staff that be the most pressing to focus on, together with governance – (so the ‘S’ and the ‘G’ of ESG, the ‘E’ element being less relevant). In contrast, a business that creates physical products – for example a manufacturing, or fashion and textiles business, or such like – should probably be more concerned about their environmental impacts.
By adopting a proactive approach, and applying it proportionally using the principle of materiality, SMEs can turn the growing demand for ESG reporting from larger clients into a competitive advantage. Moreover, embracing these practices now will not only meet current expectations, but will prepare them for the future as ESG regulation is expected to gradually target smaller businesses directly.