More and more companies are committing to a sustainable development model in order to meet social, economic and environmental challenges. But what solutions can they put in place to achieve their goals? Discover in this article a practical and realistic method for integrating ESG principles into SME business practices.

The ESG transformation of a small or medium-sized company – does it really have an impact?

Did you know that small and medium-sized enterprises (SMEs) account for around 90% of the world’s businesses? Not only that, but SMEs employ around 70% of the world’s people, and contribute up to
70% of global pollution.

Despite their important role in the economy, SMEs are generally more financially fragile, and are often exposed to considerable economic stress or pressure. This was most evident during the COVID-19 pandemic, when around a third of SMEs were forced to close their doors due to pandemic-related shocks.

To survive, of course, but also to thrive in today’s uncertain and volatile environment, you need the ability to adapt. This means having the ability to recover from setbacks (resilience) as well as the ability to take advantage of opportunities in this changing landscape (agility).

The sustainability of their products is one of the ways in which SMEs can broaden their ability to adapt (resilience and agility) and thus increase their impact on society. Environmental, social and governance (ESG) factors can serve as a guide to sustainability, and can be systematically integrated into an SME’s strategy, business model, financial planning and operational execution.

In addition to contributing to a better world, such integration of ESG factors has significant advantages:

• improved risk management;
• opportunities to create new sources of revenue;
• improved resource efficiency and reduced costs;
• greater ability to attract and retain talent;
• a stronger social license to operate;
• improved management of natural resources; and
• improved company impact.

Starting to invest your energy now can also help you respond to changing customer demand. The latter is beginning to take an interest in sustainable development, and in the companies with which it does business making the same effort. It’s the perfect opportunity to evolve with him.

ESG strategy | Where to start?

Below is a 5-step guide, offering advice to SMEs on how to identify ESG issues relevant to your company and its stakeholders. Find out how to integrate these elements for long-term success.

Step 1: Adopt a frame of reference

What is a frame of reference? Its purpose is to provide guidance and a support structure for an SME’s ESG approach. The ESG strategy, for its part, will identify material issues specific to the SME, linked to social, environmental and governance issues.

What’s in the strategy: identify your company’s specific hardware issues.

The how of the approach: defines how you will consider, implement, monitor and report on your ESG progress.

Given that there are over 2,000 voluntary frameworks, mandatory reporting requirements, methodologies and protocols available in 71 countries, including over 1,400 potential ESG indicators, it can be difficult to identify the most suitable framework(s) to use as guidance. To avoid getting lost in all these options, you need to start by establishing a clear objective.

Setting your goal

One of the first aspects that SMEs need to decide on is the objective of their ESG strategy, which can be seen from two angles. First, an SME can consider the value of ESG for itself, and how ESG will enhance its long-term business value. This concept is known as financial materiality.

Secondly, an SME can integrate an ESG strategy to increase its societal impact, known as social impact materiality. The SME’s dominant perspective will determine the appropriate frame(s) of reference, taking into account the industry, geographical area, market activities and requirements, regulations and so on.

Step 2: Consider external influences and major ESG trends

International ESG leaders such as MSCI, the World Economic Forum and S&P Global have conducted research identifying key sustainability trends. Identified trends include :

• More stringent legislative and regulatory requirements on governance, human rights and labor in the supply chain;
• The growing systemic impact of droughts and tensions related to water and climate; and
• A better understanding of biodiversity loss and nature-related risks.

Two key trends stand out:

A. Employee well-being and employment practices

Concepts such as “burnout”, “the silent departure” and “the big resignation” are impacting employees worldwide and becoming increasingly frequent topics of discussion in the workplace, in the media and around the dinner table.

Employees increasingly expect their employers to focus on critical aspects such as work-life balance, remote working, diversity, equality and inclusion, putting corporate values into practice, ethical culture, etc. Since the current economic situation can make it difficult for SMEs to meet these expectations while remaining financially viable, we need to work on a compromise.

B. The global energy crisis and the transition to a low-carbon economy

The global energy crisis, exacerbated by the war in Ukraine, is having different impacts on the transition to a low-carbon economy.

It seems that the tension between energy security and affordability on the one hand, and the low-carbon energy transition on the other, is likely to lead to adjustments in government policies and regulations. Indeed, some governments have relaxed their carbon neutrality targets and are now reintroducing fossil fuels such as gas and coal into their energy mix, while others are accelerating the expansion of renewable energies. These policy changes could lead to legislative and regulatory changes, which in turn could affect SMEs, both positively and negatively.

SMEs should be aware of these trends, and the potential risks and benefits they present for their businesses and stakeholders.

Step 3: Identify what is material (essential) to achieving the company’s objectives

To achieve your long-term value creation and sustainability objectives, you’ll need to carry out an assessment of what’s essential (and therefore material) to your business to determine which ESG elements are important to monitor. When assessing this materiality, it is important to consider various perspectives and interpretations. For example, a practical way to start the process is to examine the key ESG topics included in the table of contents of the standards and frameworks you have selected, adapting them to your specific context and objectives. Depending on your materiality perspective, you may decide to prioritize financial or social impacts, or combine the two to optimize your corporate value, while improving your social and environmental impacts.

Step 4: Identify significant stakeholders and their material issues

An SME has an impact on its stakeholders and is itself impacted by them, so identifying and understanding their reasonable needs and expectations is essential to its long-term success.

The stakeholders

Typical stakeholder groups include :

• shareholders,
• employees,
• customers,
• suppliers,
• competitors,
• industry associations,
• government agencies,
• communities,
• research centers,
• universities; and
• the media.

A stakeholder analysis must be carried out to determine their level of influence and impact on your company. At this stage of the process, it’s essential to identify the stakeholders who will be involved in soliciting their opinions on the ESG factors relevant to them.

The engagement process may involve workshops, or working meetings, during which the views of different stakeholder groups are debated and a list of material ESG factors and sub-factors is compiled. Alternatively, the process can be carried out via interviews or questionnaires sent to the various groups identified. Once all points of view have been gathered, you’ll need to analyze the data and prioritize ESG factors according to their materiality and importance for stakeholders.

Finally, once you’ve considered these points, you can finalize your ESG strategy and focus on the process of implementing it.

Step 5: Draw up an implementation plan

The success of a strategy depends on its proper execution. When drawing up an ESG implementation plan, the following aspects need to be taken into account.

A. Determine the resources required

Every business project needs resources to succeed. It’s important to assess the resources you’ll need to implement your ESG strategy. By resources, we mean financial resources, intellectual capital, human capital, social capital and natural capital.

B. Define metrics and objectives

Using metrics and targets can help you assess, quantify and track your progress against your commitments. We recommend defining objectives that are specific, measurable, achievable, realistic and time-bound (S.M.A.R.T.). Targets can also be absolute, such as tonnes of CO2e reduced per year, or intensity-based, such as tonnes of CO2e per unit produced, and should cover short, medium and long-term periods.

C. Establish a monitoring system to track progress towards objectives (ESG reporting)

A clear, transparent and regular reporting system enables SMEs to measure and track their progress against set objectives. Establish a “red thread” of reporting throughout the company, using the same ESG metrics and targets consistently across all reports. Ideally, the reporting of ESG performance data and information should be used as part of the performance evaluation of the ESG team and other relevant positions.

D. Beware of greenwashing

L’
greenwashing
or “greenwashing” occurs when companies make ecological claims and disclose information that puts them in a better position or gives the impression that they are more climate-friendly and environmentally sustainable than they really are. SMEs can fall into the trap of greenwashing out of ignorance, or as a deliberate strategy to increase the appeal of their products and/or services, thereby aiming to boost sales and revenues.