Why ESG Matters for SMBs and How to Develop an ESG Strategy?

21 December, 2021
6 min
Patrick Petti, AVP, Value Optimization

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Table of Content

Key Takeaways
What is ESG?
Why is ESG in business important?
How SMBs Can Benefit from Implementing an ESG Strategy?
How to develop an ESG implementation strategy?
Role of Order to Cash in ESG strategy?
FAQs on ESG Strategy

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Key Takeaways

  • SMBs can benefit from implementing ESG strategies by enhancing their business operations, reducing OpEx, and increasing their chances of acquiring new customers.
  • Developing an effective ESG implementation strategy involves defining your ESG goals, choosing a suitable ESG strategy framework, building an ESG task force, developing ESG action plans, and reporting on ESG performance.
  • Order to Cash (O2C) is a critical business process that plays a crucial role in an organization’s ESG strategy.
keytakeway

What is ESG?

ESG stands for Environmental, Social, and Governance. These three factors are used to evaluate the sustainability and ethical impact of a company’s operations. Environmental factors include the impact on nature, social factors relate to society, and governance focuses on internal management.

Organizations create ESG strategies to help them communicate their impact and effectiveness in three key areas: environmental sustainability, social responsibility, and corporate governance. To gain a better understanding of ESG, let’s break down the acronym and examine each component in more detail.

ESG Meaning

The ‘E’ in ESG pertains to the environmental impact of a business’s operations, including its resource usage, carbon footprint, and waste management practices. 

The ‘S’ represents social considerations, encompassing issues such as diversity, equality, and human rights.

The ‘G’ pertains to corporate governance practices and policies, ensuring that a company operates within legal and regulatory frameworks while promoting transparency and accountability.

Why is ESG in business important?

While ESG metrics are relatively new, they have grown in importance due to rising concerns over climate change, depleting natural resources, economic inequalities, and reporting fraud. Businesses that prioritize ESG considerations can gain a competitive advantage and foster long-term success.

Here are some reasons why ESG is important for businesses:

  • Make your business operations sustainable and cost-effective: Effective ESG policies help companies reduce energy, water, and waste expenses and drive strategic resource allocation. ESG ultimately helps promote top-line growth and lower costs. According to a Mckinsey report, ESG goals can effectively reduce operating expenses and increase profit by up to 60 percent.
  • Be in the good books of customers: Consumers are putting more and more stress on businesses to be socially and environmentally responsible. According to Forbes, 62 percent of generation Z will prefer to buy from sustainable brands while 50 percent of the millennials say the same.
  • Improve employee engagement and retention: Employees are increasingly motivated by purpose and social impact. Businesses that prioritize ESG can improve employee engagement and retention by demonstrating their commitment to social and environmental responsibility. Better health and safety policies can also help retain employees and improve overall morale.
  • Meet investor expectations and improve financial performance: Investors are increasingly incorporating ESG criteria into their decision-making processes. Businesses that prioritize ESG can demonstrate their commitment to long-term sustainability and improve their financial performance. Research shows that companies with strong ESG performance are more likely to outperform their peers financially.
  • Reduce risk and enhance resilience: ESG considerations can help businesses identify and mitigate risks, such as supply chain disruptions, regulatory compliance issues, and reputational damage. By prioritizing ESG, businesses can enhance their resilience and adaptability in the face of changing market conditions.
62 percent of generation Z will prefer to buy from sustainable brands

How SMBs Can Benefit from Implementing an ESG Strategy?

ESG considerations are often perceived as the responsibility of large-cap companies, but this perception is changing rapidly. SMBs can also benefit from focusing on ESG factors for long-term sustainable growth.

In fact, SMBs can enhance their business operations and reduce OpEx by improving their ESG metrics. By prioritizing ESG considerations, SMBs can also increase their chances of acquiring new customers who are increasingly demanding socially and environmentally responsible products and services.

Moreover, SMBs with a robust ESG plan will be in a better position to draw investor interest and potential merger and acquisition opportunities. By adding to their top-line growth and lowering operational and regulatory challenges, high ESG standards reduce the risk profile of small and medium enterprises.

While large businesses may have dedicated teams to look after their ESG measures, small businesses can benefit from faster decision-making, flexibility, and closer contact with their customers to drive their environmental social governance strategy.

How to develop an ESG implementation strategy?

Corporate ESG (Environmental, Social, and Governance) strategy refers to a company’s approach to addressing ESG concerns and implementing them into its business operations. Implementing a robust ESG strategy can help companies enhance their reputation and drive long-term value for stakeholders.

Listed below are the five major steps that help you build a robust ESG implementation strategy:

    1. Define your ESG goals and mission clearly

    The first step to building your ESG strategy is to define what you want to achieve on the environmental, social, and governance front. Make sure your ESG goals are SMART – specific, measurable, achievable, relevant, and time-bound. Clearly defining your ESG goals and mission will help align all your efforts in the same direction and communicate your brand’s sustainability goals to customers, partners, and employees.

    2. Choose a suitable ESG strategy framework

    Once you have defined your ESG goals, the next step is to track and measure them. ESG frameworks can help you with this task. ESG frameworks are pre-defined systems or structures that help standardize the disclosure and reporting of ESG metrics.

    While there are several frameworks available, Global Reporting Initiative (GRI) framework is one of the most commonly used ESG frameworks.

    73% of the world's 250 largest companies report on sustainability using the GRI framework.

    There are many other frameworks used by organizations in specific industries and regions. Other popular ESG Frameworks include:

    • Carbon Disclosure Project (CDP) Reporting
    • Climate Disclosure Standards Board (CDSB)
    • Science Based Targets initiative (SBTi)
    • Sustainability Accounting Standards Board (SASB)

    3. Build an ESG task force with senior executives and external experts

    Build an ESG task force with senior executives from different departments and the board to provide direction to your ESG strategies and goals. Also, loop in external ESG experts and consultants to help you complete certifications and achieve greater efficiencies. Having the right team members to drive your ESG goals is important for higher ROI and to build trust among all stakeholders.

    4. Collect ESG data from multiple sources with efficient software tools

    To make ESG disclosures, your team needs to gather data from multiple sources, including corporate social responsibility spending, emissions data, operating costs, regulatory compliance data, etc. Use data analytics software solutions to collect, validate, and track ESG metrics on one dashboard. It is also a good option to use software linked to financial planning and analysis to reconcile different ESG data and reporting systems.

    5. Promote your ESG performance

    Promoting your good ESG performance is vital to reap all the benefits of taking the sustainable path. Use email and social media campaigns, website promotions, and press releases to spread the word about your ESG success to a wider audience. Be consistent and thorough with the content you release to the public and showcase the value of ESG in core company operations and ideas.

    ESG strategy examples

    Examples of ESG plans may include setting environmental targets such as reducing emissions or waste, implementing diversity and inclusion initiatives, improving labor standards and practices, and enhancing governance practices such as transparency and accountability.

    Let’s break each one of them in detail:

    1. Environmental targets

    • Companies can set specific targets to decrease their carbon emissions by a certain percentage or achieve carbon neutrality.
    • Setting goals to minimize waste generation and promote recycling and responsible disposal practices.

    2. Equal opportunity

    • Implementing policies and practices that ensure fair treatment, equal opportunities, and non-discrimination in recruitment, promotion, and retention processes.
    • Fostering an environment that values diversity, promotes inclusivity, and encourages employee engagement and collaboration.

    3. Labor standards and practices

    • Ensuring that employees receive fair compensation, including competitive wages and benefits packages.
    • Implementing robust health and safety protocols to protect employees’ well-being and prevent workplace accidents and injuries.

    4. Transparency and accountability

    • Establishing clear reporting mechanisms and disclosure policies to provide stakeholders with transparent information on the company’s ESG performance.
    • Promoting diversity within the board of directors and ensuring the independence of board members to enhance corporate governance.

    These examples illustrate how ESG plans can encompass various aspects of sustainability, social responsibility, and good governance, allowing companies to create positive impacts on the environment, society, and their own operations.

How to navigate the evolving the ESG challenges, insights from PwC, EY, Gartner, Deloitte

Role of Order to Cash in ESG strategy?

Order to Cash (O2C) is a critical business process that refers to the entire cycle of activities involved in fulfilling customer orders and receiving payments for goods or services. It plays a crucial role in an organization's ESG strategy, and it is essential to consider ESG factors when implementing and optimizing this process. By prioritizing sustainability and responsible business practices throughout the order-to-cash process, organizations can not only improve their ESG performance but also build stronger relationships with stakeholders and drive long-term success.

Here are some ways in which O2C can contribute to an organization’s ESG strategy:

  • Environmental: The order-to-cash process involves a lot of paperwork and documentation, which can be resource-intensive and have negative environmental impacts. By automating parts of the process, such as invoicing and payment collection, organizations can reduce paper waste and energy consumption.
  • Social: The order-to-cash process also involves interactions with customers, suppliers, and other stakeholders. By prioritizing ethical and transparent business practices, organizations can build stronger relationships with these stakeholders and foster a positive reputation. Organizations can improve the speed and accuracy of billing and payment processing, leading to improved customer satisfaction.
  • Governance: The order-to-cash process involves financial transactions, which are subject to various regulations and compliance requirements. By ensuring that all financial activities are conducted in a responsible and ethical manner, organizations can avoid legal and financial risks. Automated tracking and reporting of financial data can also help organizations identify potential risks and take corrective action as needed.

In addition to these ESG considerations, the order-to-cash process can also have broader impacts on an organization's sustainability performance. For example, by optimizing cash flow and minimizing outstanding balances, organizations can improve their financial stability and reduce the need for external financing. This, in turn, can help them invest in sustainability initiatives and reduce their overall environmental footprint.

HighRadius Order to Cash automation software

FAQs on ESG Strategy

What is ESG strategy?

An ESG strategy is incorporating environmental, social, and governance factors into business decision making to achieve sustainable and ethical growth. It considers how policies and operations impact society, the planet, and financial performance. A robust ESG strategy is transparent, measurable, and accountable.

What is the purpose of ESG strategy?

The purpose of an ESG strategy is to enable organizations to align their business practices with sustainability goals, reduce risks, and enhance long-term value creation. It is a plan to meet ESG objectives such as reducing energy consumption, diversifying the talent pool, and attracting customers with sustainable products.

What are the main ESG standards?

Some of the main ESG standards include Global Reporting Initiative (GRI), Carbon Disclosure Project (CDP) Reporting, Climate Disclosure Standards Board (CDSB), Science Based Targets initiative (SBTi), and Sustainability Accounting Standards Board (SASB).

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