Environmental, social, and governance (ESG) strategies and programs are now common practice for most large, publicly traded corporations.
Despite recent efforts to politicize ESG, these companies are staying the course — and for good reason: The ranks of socially conscious customers, employees, and investors are on the rise—and these stakeholders want to do business with socially responsible companies.
In turn, a strong commitment to ESG translates into better financial results: The NYU Stern Center for Sustainable Business’s analysis of over 1,000 studies published since 2015 shows that strong corporate management of ESG correlates with improved Return on Equity (ROE), Return on Assets (ROA), stock price, operational efficiency, and risk management.
But how important are sustainability initiatives for small and medium businesses (SMBs), and what ESG strategies and practices are they putting in place? SMB Group’s SMB Business and Technology Priorities for 2023 survey addressed this topic, among others, in detail.
We found that while only 21% SMBs said sustainability is “one of the most important factors guiding our strategy,” those that do prioritize sustainability are more likely to expect revenue growth than those ranking it as a lower priority.
SMB Awareness and Understanding of Sustainability Is Rising
Although less than one-quarter of SMBs have put ESG on the fast track to date, 57% agree that “a strong ESG strategy and actions can help our business improve financial performance.”
Furthermore, while a majority have yet to make ESG a corporate priority, over half have already implemented an internal recycling program, are reducing water and energy consumption, and purchasing more recyclable goods. And, about one-quarter of SMBs plan to act in each sustainability area in the future, indicating that ESG is gaining traction among SMBs.
Benefits of Embracing ESG
SMBs increasingly recognize that in addition to altruistic benefits, adopting policies and practices can provide significant value to the business.
Attracting and Retaining Customers
Investing in sustainability-focused initiatives can give SMBs a competitive edge over non-ESG-focused competitors. When given a choice, many customers choose to buy from companies that prioritize sustainability and social responsibility. This is particularly true for younger generations. In this FirstInsight study, the majority of Generation Z shoppers said that they prefer to buy sustainable brands, and most said that they are willing to spend 10% more on sustainable products. In addition, three-quarters of Gen Z consumers stated that sustainability is more important to them than brand names. And, according to this Nielsen survey, 75% of Millennials indicated that they are likely to change their buying habits to favor environmentally-friendly products
Attracting and Retaining Employees
Positive ESG practices can also help companies attract and retain talented employees. According to MarshMcLennan, top employers (as measured by employee satisfaction and attractiveness to talent) have significantly higher ESG scores than their peers. This is key because satisfied employers work harder for and stay longer with their employers—and happy employees help recruit other employees. This research also found that Millenials and Gen Z workers place greater importance on environmental and social concerns than their predecessors do. By 2029, these two generations will make up 72 percent of the world’s workforce (compared to 52 percent in 2019)—giving ESG-friendly companies a leg up in the talent wars.
Reducing Risk and Improving Business Resilience
Climate change, resource scarcity, labor issues, and supply chain disruptions pose substantial risks to businesses of all sizes. Effective ESG practices can help SMEs identify and reduce risks associated with environmental and social factors. For example, environmentally sustainable practices, such as energy efficiency measures, waste reduction, and responsible sourcing, can help SMBs reduce operational costs and dependence on scarce resources, and achieve greater resilience.
Improving Access to Capital
Institutional investors, venture capitalists, and banks are increasingly factoring ESG into the mix when making investment and lending decisions. For instance, over 68% of the bankers surveyed in this KPMG study said that their institution has now incorporated ESG criteria into the assessment of real estate loans. SMBs that commit to sustainable and responsible business practices are likely to be more attractive candidates to investors and may be able to negotiate more favorable terms and conditions with them.
Actions SMBs take to foster sustainability can also catalyze innovation for the development of new products, services, and business models. For instance, shifting to renewable energy sources, implementing circular economy practices, or adopting eco-friendly packaging can drive product differentiation and open new market opportunities. And there’s strength in diversity: Employees from diverse backgrounds bring a wider range of experiences, views, and ideas into the company’s culture, increasing the likelihood of spotting new market opportunities and creating solutions for them.
SMBs that embrace ESG can create a positive impact on society, the environment, and on their bottom line.
Getting started doesn’t have to be difficult. As noted above, many SMBs are already acting on some sustainability initiatives. Depending on what areas you’ve already tackled, the next step is to figure out which ESG goals make the most sense to focus on next, and how to track your progress. Many areas — from recycling and reducing energy consumption to giving employees paid time off to do charitable work — make sense for most companies.
The industry you operate in is another consideration For instance, a manufacturing business may want to start by examining how to redesign products with more environmentally-friendly components and/or packaging. A consulting firm or a marketing agency might want to focus first on first.
Tracking the progress and impact of sustainability initiatives can be tricky. Currently, most SMBs are currently using spreadsheets to track and manage the impact of these initiatives. This can work well enough to get started, or for very small companies, but can get cumbersome as businesses grow, or expand sustainability efforts. Fortunately, more technology vendors are developing software designed specifically to help companies in this area. So, if you’re looking to move beyond spreadsheets, start by checking with the vendors and technology you already work with to see what capabilities they, and their partners, can provide.
© SMB Group, 2023