Richard Blundel, Director of the Centre for Social and Sustainable Enterprise, at The Open University, discusses what SMEs of all kinds can do to develop their ESG skills and use them to move their organisations forward.

ESG (standing for ‘Environmental, Social and Governance’) may not be the catchiest of business terms, but it has become a hot topic in corporate boardrooms around the world. The British Business Bank has described ESG as, ‘a set of standards measuring a business’s impact on society, the environment, and how transparent and accountable it is.’  Sceptics see it as ‘woke’ and naïve, while supporters argue that by taking their ESG performance seriously, businesses are more likely to obtain cost-effective finance, attract the best staff, win procurement contracts and generate value over the longer-term.

Until recently, the main focus of ESG has been on big businesses and public sector agencies.  But now there’s evidence that the owners and managers of small and medium-sized enterprises are also taking an increasing interest in ESG and what it might mean for their own businesses⁽¹⁾.  As with larger firms, the key drivers include, complying with industry regulations and meeting the expectations of investors, customers, employees and suppliers.  ESG spans a diverse range of complex and often contentious issues, so it can be difficult to know where to begin.  One of the easiest ways to get started is to take a look at the origins of ESG, see how it compares to other superficially similar approaches.

ESG, SRI and CSR: background and comparison

ESG in its modern form is a product of the early 2000s but we can trace its origins back to the earliest times.  Farmers, artisans and merchants have always recognised that acting ethically and responsibly can be good for business.  Earlier generations could also see that it makes sense to agree a basic set of rules to protect their businesses against rogue traders – from medieval craft guilds setting quality standards to 19^th century legislation to control the booming trade in food adulterated with cheaper, often toxic, substitutes.  By the 20^thcentury, much of this activity was being discussed under the heading of ‘corporate social responsibility’ (CSR), a closely related idea is mainly concerned with a company’s own practices and strategies, while ESG emphasises metrics, standards and reporting. ESG also has strong connections with ideas about socially responsible investment (SRI), which have long been associated with faith communities, and often took the form of avoiding certain types of investments, such as the manufacturing of weapons, cigarettes and alcoholic drinks.

Today’s ESG movement poses a direct challenge to the ‘business as usual’ approach of large corporations.  It was launched by an unlikely alliance of financiers, accountants, environmental activists and international agencies, including the United Nations.  As the scientific consensus on the climate emergency grew, people were becoming more aware of the consequences, highlighted by a spate of extreme weather events that damaged businesses and communities in every continent.  In 2007-08, the world was also rocked by the sub-prime mortgage crisis, an unprecedented corporate scandal, which generated a deep, long-lasting global recession followed by many years of austerity.  Institutional investors, including insurance companies and the big pension funds started to take climate risks much more seriously and began calling for more transparent and ethical forms of corporate governance. Today, ESG has itself become a big business, with financial sector titans like Bloomberg, BlackRock and KPMG providing a wide range of ESG data and consultancy services to financial institutions and high net worth investors.

ESG frameworks and metrics

Given its close associations with finance and investment, it’s perhaps not surprising that ESG measurement and reporting has become formalised.  For example, businesses can adopt the International Sustainability Standards Board (ISSB) framework, or sign up to the Carbon Disclosure Project (CDP), which enables companies to benchmark their performance and track their progress in decarbonising their business activities.

Understandably, many SMEs find these reporting requirements and metrics off-putting. According to The Open University report, the top barriers to engaging with ESG are a lack of necessary financial resources and skills, along with a sense that adopting ESG is simply too complex to work for their organisation⁽¹⁾.   However, ESG can also make good business sense, while also benefitting people and the planet.

‘Rising to the challenge’ – taking the next step

The Open University report, Educate, Measure, Speak up: How businesses can get ahead with ESG, offers three ways in which SMEs can rise to the challenge:

1. ‘Educate’: The first step in the learning process is to develop skills and awareness in the leadership team and find out more about how ESG applies to your own business context. You could take each of the ESG components in turn and start asking some probing questions. For example:

• ‘Environmental’: what actions have we taken to decarbonise our operations, to tackle air and water pollution, or to reduce waste?
• Social: what provision have we made for remote and flexible working, or sourcing from local suppliers?
• Governance: to what extent does our board of directors reflect the diversity of the local community?

Having reflected on these issues, and started to develop your ESG strategy, you will be ready to move to the second step, which is to promote learning across the wider workforce.  This is likely to include a mix of short courses, discussions and support policies to raise ESG awareness across the organisation, and more focused investments in specialist technical knowledge and skills that you have identified as being particularly important to your business.

2. ‘Measure’: it is important to collect data in order to manage your social and environmental impact. The Open University’s survey findings in the report demonstrate that many businesses recognise a skills gap in data analysis, so this is likely to be a priority area for staff training. However, technological innovation could make some of these measurement tasks easier.  For example, software developers are creating improved online tools for calculating carbon footprints and there is a competitive market for value-added advice services.
3. ‘Speak up’: having embarked on the first two steps, you will have a much better grasp of the ESG performance of your business, opening up new opportunities to engage with your suppliers, customers and the local community. It is difficult to over-estimate the impact that many millions of business leaders could have as advocates for positive change. For example, if you’re running a restaurant, you could influence your customers’ buying choices by offering and advertising lower carbon menu options. Your newly-acquired technical knowledge and skills can also be used to reinforce the message.  For example, the UK has a big skills shortage around heat pump installation.  Contractors with these skills will be much better-placed to seize the opportunity to promote this low carbon technology to their customers.

The UK’s six million small and medium-sized enterprises (SMEs) can be key players in tackling the world’s biggest social and environmental challenges⁽³⁾, while also generating value for their own businesses. As the authors of a recent OECD report have argued, there’s simply, ‘no net-zero without SMEs’. Collectively, SMEs still remain part of the problem, generating up to half of the UK’s business emissions, but they can also help speed up the transition towards a much healthier and more prosperous low carbon economy.

Richard Blundel, Centre for Social and Sustainable Enterprise, The Open University

Download the OU’s new report

https://www5.open.ac.uk/business/esg