Can Small Businesses Benefit From ESG Criteria?

When ESG began gaining prominence in the early 2000s, many businesses held the mistaken view that it was just a hollow feel-good PR exercise to manage reputational risk. Worse yet, many held the view that ESG principles were somehow bad for business finances.

Nevertheless, as more and more large companies began to incorporate ESG principles into their business decision making, the truth became apparent; incorporating ESG isn’t just good for people and the planet, it’s good for business.

ESG certified small business

Small businesses and start-ups have lagged behind a little in recent years when it comes to incorporating ESG principles into their business model. Often because they’re overwhelmed with the immediate day-to-day operations of their company, they simply don’t have the time to dedicate to thinking about the bigger picture.

But they should. SMEs are the backbone of the economy, with more than 400 million SMEs worldwide, they’re the main source of job creation globally. As such, SMEs are capable of huge contributions to the planet if every single one integrated ESG principles. Better still, it’s not just great news for the planet, it’s great news for business too.

What is ESG Criteria?

Let’s break down the jargon.

Environmental, social and governance (ESG) criteria are a set of standards for a given company’s operations.

Environmental criteria are the standards or pledges a company promises to meet in regard to its sustainability and impact on the planet. Social criteria refers to the company’s standards in regard to employees, suppliers, customers and communities. Finally, governance refers to standards applied to the company’s leadership, shareholder rights, executive pay and so on.

Why is ESG Important?

At this point, for large forward-thinking companies, integrating ESG has become second-nature. While sceptics will state a focus on sustainability is still a means to mitigate larger PR problems, the truth is, an increased focus on ESG criteria benefits us all either way.

The wider public is only too aware of the bleak realities that we face ahead in regard to climate change, decreased biodiversity, pollution, deforestation and greenhouse gases to name just a few. This concern has increased over the last decade, with the majority of nations worldwide now stating that climate change is a major threat to their nation.

Governments have been slow to act on this with half-hearted pledges that often don’t go far enough to appease public concerns. Though some regulations have been brought in to tackle the vast impact large corporations have on the environment, meeting these requirements is the bare minimum. Companies doing so aren’t lauded for it.

However, companies going above and beyond expectations are. These companies are rewarded with loyal customers, happier employees and keen investors.

Other companies have watched the market leaders adopt ESG principles and followed suit, making ESG a priority for all businesses — regardless of size. Those that focus on social responsibility and sustainability now are undoubtedly going to be champions in the future.

ESG Ratings explained
photo credit: Medium

ESG and Small Business

ESG integration might seem like a process that takes months for larger companies, but small businesses and start-ups actually have the advantage here. While large companies may have more resources to dedicate to more elaborate pledges, they’re so often held back by red tape.

Policies and pledges have to be agreed across different teams, signed off by different higher ups and no end of other bureaucratic processes that hold up progress. Whereas small businesses almost always have swifter decision-making processes.

This means, while their pledges might not change the world on their own, they can make great contributions with fast, small changes. Things like switching to digital receipts, renewable energy, hiring diversely and more can all be implemented easier and make a greater impact locally.

Not only is the initial impact great, but small businesses who integrate ESG principles now are future-proofing themselves. Regulations are bound to increase as governments face increasing pressure to meet climate targets. Small businesses who adopt the new norm approach are far less likely to be caught out later on.

Targeting the Customers of Tomorrow

The concerns the public have over climate change and social responsibility have impacted consumer behaviour, especially generationally.

Millennials and Generation Z are increasingly turning to local, green businesses. Large brands like Walmart or Amazon are increasingly treated with suspicion and scepticism. Their consumption behaviours are more tied into their values than ever before.

Take, for example, the Black Lives Matter movement and the momentum it built in 2020. Companies were expected to come forward and state their support and allegiance. Those that did were praised by these generations, while those that refused were condemned.

Small businesses that prioritise the consumer behaviour of younger generations can integrate ESG principles to align with these values.

Better Talent

ESG can also attract better talent for small businesses.

Employees increasingly want to work for a company that does good. This doesn’t mean every company needs to be a non-profit that’s hell-bent on changing the world. But companies need to align with employees’ values and ethics.

In fact, three quarters of millennials would take a pay cut to work for a more socially responsible company.

While precise values and ethics obviously vary from individual to individual, the vast majority of employees will appreciate a focus on sustainability, social responsibility and responsible governance.

Businessman goes green

Treat ESG as an Opportunity

All the above should convince small business owners that ESG is far from being a dull requirement reflective of changing times. Quite the opposite, it’s an opportunity.

ESG integration can help your small business attract new customers, new talent and enhance your brand. Ultimately, improving your business with sustainable growth.

Those who fail to do so face losing their customers to more socially conscious competitors. With undoubtedly volatile times ahead, ESG can help build resilience for small businesses and should be embraced.