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What is ESG & what does it mean for SMEs?

8 min read  |   1 June, 2022   By Aimee O'Callaghan

Three wooden blocks are lined up on grass, with a green background. One block has a capital E with environmental written underneath, the second has a large S and social written underneath and the final block has a large G with governance printed beneath.
    

In October 2021, the government published its Net Zero strategy – to decarbonise all sectors of the UK economy by 2050. It’s reasonable to assume that over the coming years, there will be environmental targets imposed upon businesses to meet this goal.

According to recent research by Lloyds Banking group, 4 in 10 SMEs are unsure how the government’s Net Zero aim will affect them.

In this blog, Breathe HR Partner, Níamh Kelly, (Director at HR Dept Shropshire, Wrexham & Chester) provides valuable insight & advice for small businesses on ESG and tips on implementing sustainable strategies into organisations.

So, ahead of World Environment Day on 5th June, why not get ahead now and discover what ESG is - and how it can help your SME?

 

What does ESG stand for?

ESG stands for environmental, social and governance – and how these strands operate within a business.

ESG covers a broad spectrum of methods, ethics & ways businesses operate, all tying back into where the organisation fits within the wider world, considering its social and environmental responsibilities – and ensures it governs with a conscience.

 

Why should small businesses care about ESG?

Including ESG into your business essentially means becoming an organisation that is focussed on purpose and values.

And it’s not just what businesses do that matters – it’s also how companies behave & how they’re viewed.

Níamh Kelly, (Director at HR Dept Shropshire, Wrexham & Chester) summarises why it’s important that small businesses consider their ESG strategy:

“There is an increase in public scrutiny around perceived behaviours of business – particularly post-Covid. 

Organisations that are seen as values-led with compassionate leadership, are more likely to attract employees who share those values and are more engaged in ensuring the business is successful.”

Environmental, social and governance policies are also becoming more of interest to business investors. According to the Confederation of British Industry, “today’s investors want to invest in sustainable businesses with good investment models and integrating ESG factors.”

It’s worth noting that this doesn’t just refer to investors in the traditional sense – but all providers of finance into your business. Whether this is a bank loan, a direct investment or an equity finance agreement, ESG is of increasing importance to business financial providers.

The enhanced focus on ESG has been driven by a shift in investor focus, according to Acting SEC Chair Allisson Herren Lee.

This increasing social conscience extends into social responsibility diversity, equity and inclusion too, as an FCA report explains.

“Companies and consumers are increasingly looking beyond climate change. They are also considering wider environmental issues, such as nature and biodiversity, as well as social and governance issues, such as diversity and inclusion, the living wage, fair taxation and supply chains. And there is growing attention on the need for a 'just transition', which considers the social consequences of the shift to a Net Zero economy.”

 

What should an ESG policy include?

Níamh Kelly, (Director, HR Dept Shropshire, Wrexham & Chester) has advice for business-owners who may not know where to start when considering the ESG efforts of their organisation.

Níamh advises that considering the impact and actions of your business across all these areas is a good starting point. According to Níamh, a good ESG policy will focus on the below key areas:

  • Equal opportunities
  • Good relations with other providers and professionals
  • Community impact and the environment

Businesses with strong sustainability strategies are more likely to have a better reputation & improved trust amongst their customer base and partner companies.

We’ll take a look at how small businesses can improve their ESG strategy by looking at the three main pillars of ESG, environmental, social and governance.

 

Environmental pillar

We’ve already covered how to boost sustainability within organisations in a recent blog , but this pillar of ESG requires a closer look at the environmental statistics of your organisation – and what you can act on.

Are there ways you can further cut waste, or reduce water, CO2, or energy consumption? What’s your carbon footprint like – and can you pledge to reduce or offset it?

Níamh Kelly, (Director, HR Dept Shropshire, Wrexham & Chester) offers helpful advice for SMEs who want to boost their environmental efforts:

"Even the smallest business will already be doing something that integrates social and environmental concerns into their business operations. 

For example, every business is concerned about their energy costs, which directly links to the environment and climate change.

The first thing I would do is start with statements on ‘reduce, reuse and recycle’. Make sure you switch off equipment when not in use and limiting unnecessary printing."

Getting creative and implementing these ideas into business strategy will help you to reduce spend as well as ensuring environmental targets remain a business priority.

But don’t just say you’re going to do your bit as an organisation and not follow through – simply paying climate ‘lip service’ is damaging to your company reputation (both internally and externally) as well as to your employer brand.

 

Social pillar

The important aspect here is looking after your people & considering your organisation’s social responsibility. This includes areas like considering your business supply chain & having a good relationship with providers and partner companies, which Níamh Kelly, (Director, HR Dept Shropshire, Wrexham & Chester) advocates:

Recent CIPD research identified that one of the future trends for employers will be their approach to being sustainable and responsible businesses, with a clear social value and purpose. 

Commitment to environmental policies (such as limiting the effects of climate change) and corporate social responsibility policies such as volunteering; are already something that funding agencies look at when allocating grants and loans. 

However, with the UK currently facing almost full employment, small businesses are having to compete to attract and retain employees; and being seen to go ‘above and beyond’ as a sustainable and responsible business, could play an important role in that.”

Níamh advises that this also encompasses offering equal opportunities as a business, making sure you’re a fair and responsible employer. 

This also includes being vigilant about not using slave labour within any part of your supply chain & paying a fair living wage to suppliers globally.

A by-product of considering sustainability is that you can make your business a more attractive organisation to work for & improve brand reputation – employees are increasingly looking at the environmental/sustainability of potential employers (something Gen Z cares about, in particular).

 

Governance pillar

Get ahead of the curve – ESG isn’t yet officially regulated for small businesses, although things are slowly moving that way. Stay one step ahead of competitors by being forward-thinking and implementing sustainable governance policies and reporting earlier on.

Good risk management appeals to both investors & your supply chain so it’s worth considering how to improve strategies in this area.

Make sure you take a look at your board, too. How diverse is it? It’s also a good idea to ensure you have policies in place that sufficiently cover discrimination, ethics & sustainability.

Taking steps now to consider organisational governance will boost business success ten-fold later on – in terms of investment, policy & getting ahead of the curve (in case of future potential regulation for small businesses).

 

Implementing an ESG strategy

ESG shouldn’t simply be a ‘tick-box’ exercise for businesses. To succeed with implementing successful ESG policies, business leaders & employees alike need to ask themselves how they can improve sustainability – and have more awareness of their social responsibilities. Within your business, you could get employees involved by appointing sustainability ambassadors, for example.

This needs to be an all-in approach, rather than filtering from the top – true success is achieved when the entire business is aware of and engaged with the ESG strategy.

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