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Environmental, Social and Governance (ESG) strategy, why is it important for SMEs?

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Environmental, Social and Governance (ESG) strategy is becoming more important for the continued success of all companies, regardless of their size. As climate change creeps up the public awareness list, businesses and consumers are more likely to consider a company’s ESG performance before choosing to buy their products or services. So, should SMEs devote more resources to ESG reporting?

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With conversations around the environment and ethics high on the agenda for the UK Government, it is unsurprising there are requirements in place for large corporations to report on their ESG strategies. These requirements are mainly geared towards listed companies, there are now some reporting requirements for larger private companies and it seems likely that in the future these requirements will trickle further down to SMEs. So, for SMEs, focusing on ESG now will not only ‘future-proof’ their reporting, but more importantly may also help to promote their environmental and social credentials to a wider audience.

Step 1

The first step for SMEs should be implementing a comprehensive ESG strategy. There are many smaller businesses who have chosen to make a positive environmental and/or social impact by investing their resources in relevant activities. Of course, taking the step of putting written details into the public domain creates a commitment against which a company can be measured, therefore it is vital that decision makers follow through on their plan and make sure it is clearly understood throughout the business.

Benefits of an ESG strategy

There are many positives to integrating an ESG strategy into an SME’s corporate reporting. The first major benefit being that it is likely to increase engagement with key stakeholders. It is now more common practice for businesses to ensure that suppliers and customers have an ESG strategy in place before choosing to do business with them.

Staff attraction and retention

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Employees are increasingly more likely to focus on a company’s ESG activities when selecting which company to work for, so public displayed information on ESG could help to differentiate the business in a competitive jobs market. At a time when many businesses are struggling to attract and retain talented people, a commitment to ESG is moving up the boardroom agenda.

Future proofing

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Investors are now more commonly seeing ESG strategies as a “need to have” rather than a “nice to have” in order to protect and future proof their investments.

For SMEs who are considering reporting on ESG for the very first time, seeking advice from an audit professional is recommended, preferably one that has a good understanding of the business and its market already.

Reporting requirements

The International Sustainability Standards Board (ISSB) has recently released comprehensive guidance on how bigger companies should be reporting their Environmental, Social, and Government (ESG) strategy. While these have not yet to be officially implemented, the UK Government has recently announced that it intends to incorporate them into their current framework in the future. Rather than following this extremely thorough guidance to the letter, SMEs might use them as inspiration to gather ideas about how they might enrich their reporting to reflect their ESG performance. It is also a good idea to look at existing regulations and guidance for larger organisations, to get a better idea of what SMEs may need in the future.

Key elements to consider

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Some important elements that SMEs might want to include when creating an ESG report is a narrative overview to explain their overall approach and the changes they are taking to improve their performance in this area. Where possible, KPI metrics should be included to show year-on-year trends, as these will demonstrate the positive effects that the ESG strategy is having, on the business. An example of this could be;

  • Details of a company’s energy consumption
  • Details of a company’s carbon emissions
  • Details of supplier payment terms

Being socially and environmentally conscious is becoming increasingly significant to all businesses, not least SMEs and for many it is a core element of their brand identity. As well as demonstrating a willingness to do the right thing, SMEs should consider going a step further by making sure that they have a formalised policy in place and communicating their ESG performance in an engaging and transparent way.

If you are considering reporting on ESG for the very first time, contact James Hadfield below.

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