There are huge value creation benefits associated with environmental, social and governance (ESG) initiatives – whether it be cost savings through improved water efficiency, or improved employee productivity and engagement by creating a better workplace. The good news is that ESG initiatives do not have to be big or expensive to make a difference – you do not have to invest in brand new technologies or hire ESG experts to get started. In fact, many SMEs are already on their way there!
We know that SMEs are concerned about the cost of living and burdensome supply and operational challenges. So, the question is, how can SMEs balance business growth and stability with the requirements and costs of ESG practices? The first step is to understand how your existing practices might count as good ESG and how to leverage these as long-term value creation tools. Take Pend Books for example, an independent bookstore in Whithorn, Dumfries and Galloway, who recently improved their energy efficiency by insulating their walls and windows, switching to LED lighting, and installing a biomass pellet boiler. These actions led to estimated annual savings of £4000. Here are some more examples of how!
Improved employee productivity
Environmental and social sustainability initiatives can be a great tool for strengthening overall employee satisfaction. Creating a safe, fair, and inclusive workspace can lead to improved productivity amongst your team alongside higher retention rates, and a fall in sick leave.
New research from Deloitte shows that in 2021, poor mental health cost employers £56 billion with around 65% of 18–29-year-olds who left their job that year citing poor mental health as the reason. Flexible working opportunities and mental health training are just two initiatives that can help improve work-life balance and reduce stress levels.
The Emerald Group, an SME that provides recruitment services, has implemented several mental wellbeing initiatives. Sarah Windrum – co-founder and CEO – believes that the most important step is to encourage an “open and honest culture” that empowers employees to discuss the challenges their facing. She says, “those of us struggling with our mental health will know what we can do to manage it, so listening and being flexible is key”. And, she adds, any investment you make into improving employee wellbeing will “pay your business back ten-fold.” Indeed, research suggests that for every £1 an organisation invests into employee mental wellbeing they can expect on average a £6 return.
One way of reducing costs is by improving operational efficiency and resource management. We gave the example earlier of Pend Books’ energy costs saving measures. Even the simple act of asking your energy supplier to install a smart meter can help you keep track of your energy consumption and then take steps to reduce your energy usage. Another example is Glandore, an estate agent in Belfast, that saves around £5000 a year on their water bill through simple steps such as keeping track of their water usage, quickly repairing running toilets and taps, installing sensor operated taps, and encouraging a water saving culture at work.
Attracting and retaining new customers
Customers are increasingly concerned about the environmental and social (E&S) performance of companies. A YouGov survey of U.K. adults found that 52% consider a brand’s eco-credentials when deciding whether to purchase from them, while 21% have actively stopped buying a specific brand or product over environmental concerns. In the next decade, Millennials and Generation Z will become the most important consumer groups and their demand for sustainable products is well documented. Indeed, nearly 90% of Gen Z consumers said they would be willing to spend 10% extra or more on sustainable products.
Effectively communicating your company’s commitment to sustainability and the actions you are taking is a great way to attract new customers. In the fashion and textiles industry, numerous smaller businesses are capitalising on the fall of fast fashion by emphasising their sustainable credentials. For example, clothing brand Colorful Standard has grown rapidly in popularity over the last few years – something witnessed by one of the co-authors – due to their committed to using sustainable materials, eco-friendly dye, and local manufacturing.
Consistently talking about the actions you are taking to improve your E&S performance on social media, your website and at every opportunity will benefit your business. It will help you tap into the growing market for green and ethical products, whilst also making you more appealing to larger companies looking for suppliers that have lower E&S risks in terms of carbon emissions and human rights abuses.
In competition for talented employees, companies need to demonstrate how they are managing their environmental impacts and their contribution to society. In a recent survey, nearly 70% of individuals said that if a company had a strong sustainability plan then they were more likely to work for them long-term, while around a third said they put more time and effort into their job when working for a company with a sustainable agenda. Again, as with attracting new customers, the key is to talk about and emphasise the actions you are already taking or plan to take.
Increased access to funding
Integrating effective ESG practices into your business operations can improve access to funding from a range of stakeholders. Investors, funds, capital markets and financial institutions are increasingly asking SMEs to disclose and demonstrate their commitment to more sustainable business practices. EY’s Global Private Equity Survey 2021 found that around two-thirds of investors consider ESG factors. Banks are also increasingly demanding ESG policies and performance from the companies they lend money to. Research by the Association of MBAs found that on average an 11% increase in an SME’s ESG performance will decrease its credit risk by 3.5%.
Innovation and new business opportunities
Numerous SMEs are coming up with creative solutions to global challenges whilst simultaneously creating new business opportunities. For example, the circular economy industry, which promotes the elimination of waste, could be worth around $4.5 trillion by 2030 – and companies are capitalising on this. Resuer is a reusable container service operating across independent cafes, restaurants, and markets in East London. The idea is simple, individuals pay a deposit for containers and cups and then they get a refund when the container or cup is returned. Gjenge Makers is a manufacturing company based in Kenya that produces sustainable low-cost construction materials made from recycled plastic waste and sand.
As we said earlier, we know it’s tough out there and the idea of any additional obligations only makes it more overwhelming. However, no business – big, medium, small or micro – can afford to bury their head in the sand when it comes to their impacts on the natural environment or society. The good news is that many SMEs will be surprised to see how much they are already doing to make a difference. In our next few articles, we will give guidance on how you can identify and manage your material impacts. Keep watching this space!