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

What you’ll learn


  • An ESG strategy is important for businesses of all sizes.
  • ESG can help companies to acquire new customers and investors.
  • It is important to promote your ESG performance.

For a long time, financial metrics have been the lone indicator of success for businesses. Not anymore. As the cry for sustainable and inclusive growth grows louder, we see an increasing number of CFOs and CEOs embrace environmental, social, and governance (ESG) targets to meet customer and investor expectations.

Are you ready with the ESG strategy for your  business? Don’t worry if you are unsure. We will help you learn about the basics of ESG through this article. We also dispel the myth that ESGs are only for large companies and offer a 5-step approach to build your ESG strategy.

What is ESG?

ESG stands for Environmental, Social, and Governance. First coined in 2005, ESG covers a wide range of issues that may have a direct or indirect impact on financial relevance. Some of these issues that come under the purview of ESG reporting include resource management, (green) supply chain management, organizational health, safety policies, and building trust through transparency.

By reporting ESG metrics, a company discloses how it defines and measures its impact and utility in the three areas: environment, social and corporate governance. Let’s break down ESG into its acronyms to get a better understanding.

  • ‘E’ in ESG, refers to the impact of the business’ resource usage on the environment such as carbon footprint and wastewater discharge.
  • ‘S’ in ESG refers to social regulatory metrics, such as gender pay gap, equality, or diversity.
  • ‘G’ in ESG looks at governance, practices, and policies that ensure adherence to regulatory and legal compliance.

Some companies also consider their customers’ and supply chain partners’ policies when reporting ESG metrics.

The 3P approach—People, Planet, and Profits—is often used by companies to work on their ESG goals.

3Ps

Why is ESG important for your business?

While ESG metrics are relatively new, they have grown in importance because of the rising concerns over climate change, depleting natural resources, economic inequalities, and reporting fraud.

Here’re some reasons why ESG is important for your business:

  • Makes 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.
  • Score bonus points with investors: Investors are increasingly considering ESG as a typical aspect of the investment process. People, planet, prosperity, and principle of governance are some metrics that investors consider to measure a company’s performance.
  • Improve employee loyalty: Employees are also invested in corporate responsibility, so ESG reporting can contribute to employee productivity and help lure talent. Better health and safety policies can also help retain employees.

Is ESG for businesses of all sizes?

ESG is often considered the responsibility of large cap companies and not something that SMBs can shoulder. But this is wrong.

Businesses of all sizes need to focus on ESG factors for long-term sustainable growth. Small and mid-size businesses can enhance business operations and reduce OpEx by improving ESG metrics. It also increases your chances of acquiring new customers.

Small and mid-sized businesses with a robust ESG focus will be in a better position to draw investor interest. They also have a higher chance of M&A options. Having high ESG standards reduces small and medium enterprises’ risk profile by adding to their top-line growth and lowering operational and regulatory challenges.

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 ESG strategy.

How to develop an ESG strategy?

In this section, we discuss five steps that help you build a robust ESG strategy. An ESG strategy refers to the plan you have to meet ESG objectives such as reducing energy consumption, diversifying the talent pool, and attracting customers with sustainable products.

1. Understand what drives your organization’s need to report

Defining what you want to achieve on the environmental, social, and governance front is the first step to build your ESG strategy. Some examples of SMART ESG goals include 0.5% reduction in emissions by 2025, zero-fraud in reporting, or putting in place a diversity hiring plan by 2022.

Define your ESG goals and mission clearly so all your efforts are aligned in the same direction. Defining ESG goals will also help your customers, partners, and employees identify and resonate your brand with the sustainability goals that you stand for.

2. Choose a suitable ESG framework

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

ESG frameworks set the metrics and qualitative details that a corporation should disclose. They also provide the format and frequency of reporting.

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

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. Recruit ESG experts

Build an ESG task force with senior executives from different departments and the board. This taskforce can provide direction to your ESG strategy 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.

Sample composition of an ESG team:

  • An executive representative.
  • 2 – 3 Stakeholder representatives (e.g. staff from asset management, investor relations, tenant relations, and property management departments)
  • 1-2 In-house team members focused on sustainability initiatives (e.g. Director of sustainability operations)
  • A consultant, if applicable or needed

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

To make ESG disclosures, your team needs to gather data from multiple sources —corporate social responsibility spending, emissions data, operating costs, regulatory compliance data, etc.

Companies will also have to calculate the indirect carbon emissions by their suppliers and the carbon footprint of factories that provide outsourced manufacturing.

While collecting and validating all this data can seem tedious, data analytics software solutions can be of immense help. It is a good option to use software linked to financial planning and analysis to track ESG metrics on one dashboard.

Such applications also enable accountants to reconcile different ESG data and reporting systems.

You can use third-party sources organizations such as Bloomberg or other consulting firms to help collate the data and prepare the necessary reports.

5. Promote your performance

Promoting your good ESG performance is vital to reap all the benefits of taking the sustainable path. Make sure you get the word out about your ESG initiatives with the right target audience and on social channels.

Be thorough and consistent with the content you release to the public. It is very important to showcase the value of ESG in core company operations and ideas.

Email and social media campaigns, website promotions, and press releases are good ways to spread the word about your ESG success with a wider audience.

Next Steps

Get started with developing your ESG strategy right away to build a sustainable and future-proof business.

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