ESG for small businesses: What you need to know

ESG stands for environmental, social and governance. Delving briefly into its history will immediately provide valuable insights into why it is important.

Although ESG has been around since the 1960s, the first popular use of the term was in 2004 in a report called, Who Cares Wins, a joint initiative of financial institutions at the invitation of the United Nations.

The UN Principles for Responsible Investment (PRI) require ESG criteria to be incorporated into financial evaluations of companies. Increasingly, major institutional investors are making it clear they expect companies to hold ESG criteria.

But why did ESG start life as a financial investment initiative? Why do big investors care? Surely investors are more concerned with longer-term profitability than ESG considerations?

The answer is that it is all about RISK.

Indeed, investors want to ensure good returns on their investments but what happens when a scandal hits a large corporation? Share prices fall, which can be disastrous for investors as recovery may be a long road.

Scandals could relate to the behaviour of individual board members. It could also relate to high or uncontrolled carbon emissions, pollution, resource depletion, lack of internal controls, poor diversity and inclusion practices, breaches of human rights and labour standards in supply chains, bribery and any number of other poor business practices.

A drop in share prices is not generally relevant for small businesses, but anything that risks the reputation of your business is. Bad practices can adversely impact any company’s reputation quite dramatically. And they could also be costly if you are breaching regulations.

Since its first mainstream appearance in the early noughties, ESG remained predominantly relevant to the corporate world. However, over the last few years that has changed dramatically to the extent that embedding good ESG practices is increasingly essential for any size and type of business from a sole proprietor upwards.

What is ESG?

ESG can be described as a framework to capture all the non-financial risks of a company’s day-to-day operations.

Watch this webinar to understand the basics of sustainability and why some of the common myths about net zero need debunking:

Environmental

With the constant rhetoric about reaching net zero, one might presume that is the starting point for environmental consideration. Yet the climate crisis is not the only environmental concern we have and a more rounded approach that looks at all aspects of a business’s environmental impact is more effective. This holistic approach, combined with better communication across all levels of society, can speed up the drive to net zero.

There is no one-size-fits-all for small businesses and thus, it is incumbent upon each business owner/director to consider what their impacts are. If there are budget constraints, think about low-cost and no-cost quick wins. If you have a bigger budget, consider actions that will have the most positive impact on the environment while also providing cost savings for your business with a good ROI.

Many small business owners work from home and think their environmental impacts are so small they are not relevant. That is never the case. Small changes multiplied by five million small businesses can have a massive impact.

The best way to proceed is to sit down with your team if you have employees and systematically think of all the things you do in your business and what changes you could make. And do remember that those impacts are not always immediately evident.

For example:

• Your website has a carbon impact as do all your other email practices. Every online activity uses huge servers to power those actions. Large downloads, high-res pictures, videos and large attachments increase power usage

• Do you know where the money in your bank accounts, personal pensions and workplace pensions is invested? Quite probably a portfolio of assets including stocks, shares and bonds may be supporting industries, such as fossil fuels, tobacco, gambling and more

The purpose of this blog is not to provide a sustainability course but to encourage you to stop and think very clearly about what you can do to reduce negative impacts and introduce positive impacts.

Below are various environmental concerns you should be addressing. It is not just what you do within your business; it is that broader supply chain story of how goods are made, transported and used and how waste is dealt with by the end user.

• Climate change, particularly the reduction of carbon and other greenhouse gas emissions. Carbon offsets will never be the solution

• Air, water and soil pollution

• Depleting natural resources

• Biodiversity loss and habitat destruction

• Excessive waste and inappropriate disposal

Social

A better word might be ‘people.’ And, as with the environment, the relevance to a small business is greater than one initially might think.

Social stands for all the people your business interacts with that is all your stakeholders:

• Employees, if you have any

• Customers

• Suppliers, with paying within 30 days being a priority

• Local communities

• People in your supply chain

Specific issues are:

• Physical, emotional and mental wellbeing in the workplace

• Diversity and equality

• Human rights and modern-day-slavery

• Community impact

Many small businesses will say that they do not have the time, resources or money to support their local communities. And yet ironically, many are often doing more than they realise.

A partner in a small firm of solicitors said they were a small team and they did not have time to get involved with the local community. I suggested a few options that did not need to take up a huge amount of time:

• Mentoring a young person for just one hour a month – oh, we do that weekly.

• Allocate pro bono hours – yes, we do that too

• Become a trustee for a local charity – all the partners do that for at least one local charity

• Offer apprenticeships or other training programmes – yes, we always have trainees

And so it continued. In other words, they were supporting their local community in a way that was appropriate for their business and impactful for the community they served. The young women walked away feeling pleased with what they were doing and vowing to take a more strategic approach to community support in the future.

Consider how those activities, which they were very clearly enjoying, impact the business. Yes, increased awareness of the company’s existence and increased reputation.

Community support does not necessarily mean being financially philanthropic or volunteering although, of course, both options are always welcome. But there are other ways to get involved:

• Payroll giving schemes

• Work experience

• Employee and purchasing locally

• Workplace collections for foodbanks, smellies for hospitals or domestic abuse centres, toys at Christmas time

• Offer volunteering hours or match-fund employees' volunteering activities

• Involvement in large community events as sponsors or volunteer support

• Street cleans / beach cleans/ river cleans

• Could a charity make use of goods you might be about to throw away? (Check out A Good Thing CIC, a fantastic platform that matches business waste with local charity wants)

Communication internally and externally is essential to engage and motivate employees, as is effective communication with all your relevant stakeholders. They all need to know and understand company values.

Governance

Governance encompasses the system by which an organisation is controlled and operates and the mechanisms by which it and its people are held to account. Ethics, risk management, compliance and administration are all elements of governance.”

– The Governance Institute of Australia

In the corporate world, governance generally relates to the board of directors and areas of concern in terms of ESG scrutiny are likely to be:

• Executive pay

• Corruption

• Political affiliations and donations

• Board composition: Diversity, equality and inclusion

• Tax strategies

• Transparency

• Auditing and compliance

There is overlap but governance in a small business is quite different. In most cases, the director/directors are actively involved in the day-to-day running of the company.

Good governance in a small business means operating efficiently, meeting and exceeding legislation, having appropriate systems in place and clear lines of communication internally and externally. Good governance means operating a business responsibly, efficiently and ethically.

Who should care about ESG?

ESG for start-ups

While ESG can be implemented within a business at any stage of development, it is easier to embed at the earliest opportunity. For start-ups, ESG principles should be embraced in the planning stage to provide a firm foundation on which to develop the company.

ESG should be more than a plan or process. It should align with company values and, as part of the development process, start-ups should identify their values, purpose and shape their fledgling business accordingly.

If your start-up requires investment, ESG policies will be required. Many banks, even for a basic current account, require ESG considerations to be built into a business plan.

ESG for small businesses

Risk and reputation go hand in hand and for any business to prosper long-term in this socially connected and rapidly changing world, small businesses should embed ESG principles to ensure they are operating responsibly, efficiently and ethically.

ESG for big corporations

While risk and reputation are a concern for small businesses, for big corporations such concerns can be magnified exponentially. Institutional investors, shareholders, NGOs, clients and consumers are continually questioning and challenging the ethics of big companies.

It is now widespread practice for large corporations to include ESG reporting in Annual Accounts. Failure to do so often raises concerns. Full ESG reporting is not yet mandatory in the UK although Sustainability Disclosure Standards will be referenced in future mandatory reporting requirements. However, since 2022, publicly quoted companies, large private companies and LLPs must meet mandatory climate-related financial disclosures.

Why is ESG important for small businesses?

Having already identified key reasons why ESG is important, let’s summarise and extend:

• Risk and reputation

• A benchmark for responsible, efficient and ethical operations

• Potential future mandatory requirements

• Enhancing opportunities for growth, investment, grants and awards

• Customer/ supply chain requirements. Whether you sell your goods or services to consumers, private or public sector, your ESG credentials are increasingly likely to be scrutinised

• Attract the best talent

• Build a business you can be proud of

Common mistakes small businesses make with ESG

Authenticity. Authenticity. Authenticity

Watch this webinar to understand why authenticity is the answer to your business's success:

Small businesses are unique. While there may be common strands, there is not a one-size-fits-all benchmark for small businesses. Templates can be useful resources but they should always be used as a basis to develop plans and processes.

Similarly, while policies are useful and often a legal requirement, they have no value if merely downloaded from the web and your company name inserted.

Start or develop your ESG journey by carefully considering what is appropriate for your business. Ensure you are completely authentic in your approach and disclosures.

Avoid a tick-box approach at all costs as there may be short-term gain but long-term pain as your inauthenticity is uncovered.

And do ensure good communications internally and externally. Authentically engage your team, if you have employees when developing ESG policies and plans.

And please, if you have taken the right approach to embedding ESG principles and are authentically reducing negative social and environmental impacts and increasing positive impacts, do feature your actions on your website and social media. If your customers want to purchase goods and services from responsible companies, how can they make an appropriate decision if you don’t authentically provide the information they may be looking for?

Relevant resources

• B Corp companies: What are they and how do you become one?

• How to do a sustainability audit for your small business

• Plan it with Purpose: Sustainability discovery tool