ESG For SMEs

Regulatory requirements and public concerns around climate change, resource use, water scarcity, labour relations and corporate governance have brought sustainability into the mainstream and high up on the agendas of large businesses and governments across the world. All the more reason why it is important for privately-owned businesses and small to medium enterprises (SMEs) to be included in this transition. This is because privately-owned businesses and SMEs drive most of the economic activity and consequently have the biggest impact (as a sector) on our sustainability.

Furthermore, and quite critically for the sector, it is shaping the behaviours of customers and consumers. According to the Global Future Consumer Study (2017), nearly one-third of the population was born between 1997 and 2012 (Generation Z) and they prioritize social justice, action against climate change and let their individuality shape their purchasing behaviour. Consumption is driven by trust, personalization and alignment with personal values for this generation and the one that comes before it (1981 – 1996). Another important issue to consider is that Environmental, Social & Governance (ESG) integration is key for attracting and retaining talent. The modern professional is purpose-driven and wants to work with companies that they can be proud to be associated with. According to the Cone Communications Millennial CSR Study (2019), 64% of millennials (1981 – 1996) look at a company’s corporate social responsibility before committing to work with them.

There is a lot more in it for the SME, and the SME has an advantage over the large corporate when it comes to integrating ESG in a meaningful way.

This is due to SMEs being able to make decisions sooner and faster. They are more flexible and are more responsive to their customers. This allows the small to medium-sized business to make simpler, quicker-to-implement changes that can make a significant financial difference. Changing markets and consumer behaviours are opportunities for the SME to achieve cost-efficiency, innovation and brand enhancement through the integration of ESG factors. Going digital to improve efficiencies in the delivery of products and services, switching to work-on-demand models to reduce payroll expenses while allowing workers time to pursue other interests or just spend less time in the office, find new revenue streams in the reuse and/or redesign of products and services, and so forth.

This all begins with understanding where the ESG risks and opportunities lie for the SME, through an assessment of these and developing a roadmap for the business to becoming more resilient, responsible and responsive.

“The questions small businesses may want to ask themselves are:

• What are the megatrends affecting our business?
• How can we make our supply chain more resilient by choosing a more sustainable path?
• How can we reuse or redesign our products and services to ensure demand for these remains?
• How can we ensure our supply chain is sustainable?
• Is there a possibility to become more efficient
  by reusing material, look at alternative sources, renegotiate supplier contracts, and at the same time strengthen our brand’s sustainability image?” – Ylva Hannestad, Deputy Head of Group Sustainability Finance.

A global challenge to the adoption of ESG integration as a strategy in small to medium-sized businesses
is a perception that these developments (changing consumer behaviours and shifts in the regulatory environment) are threats rather than opportunities. Companies are often discouraged by what seems to be a complex exercise they may not have the knowledge nor the resources to undertake. Our ESG service line at Mazars seeks to respond to this fear of methodological complexity and make more accessible the ability to analyse the multitude of factors to be managed and reported upon to transition to a business model that integrates ESG considerations.

The stakes could not be higher. SMEs are the backbone of every market economy and without the proportionate action, may find themselves having trouble operating in a changing world and unable to compete. Asset allocation strategies are changing and that may raise financial challenges for SMEs looking for investment. Competitors may exploit opportunities with lower operating costs due to more efficient business models that may trade them out of business. Finally, if we want to create a sustainable economy, SMEs must be a large part of the agenda.

A thriving SME sector is the engine for growth and that growth needs to be sustainable.

Enquiries:

esg@mazars.co.za