Why it’s crucial SMEs get ready for ESG reporting now

SME Publications/ SME XPO 2024

By Richard Singleton, below, Finance and Sustainability Director, Menzies LLP

Some SMEs are beginning to struggle as the larger companies in their supply chain are increasingly expecting them to be able to report on their Environmental, Social, and Governance (ESG) performance. At the same time, some broader narratives concerning ESG in the press can skew towards the negative – we have seen businesses abandoning diversity targets in bonus schemes in favour of profits hailed as a mark of failure for the ESG ‘movement’. Given the perceived minefield involved with reporting ESG data and this negativity from some corners of the media, it’s easy to understand why it can feel easier to shy away from it until a legal mandate is in place for all businesses.

Yet, with ESG reporting quickly becoming the norm for large companies and likely further regulation for smaller businesses coming down the pipeline, SMEs must ensure they are prepared from a compliance perspective. What’s more, growth-minded businesses will also be aware of the value that ESG data can bring even aside from ensuring a smooth audit and annual reporting process: business strategies that take ESG into account can boost operations, financial performance, and attractiveness to investors in a business landscape where funding is ever-crucial. Increasingly, too, performance on ESG is helping businesses to attract and retain the best employees, with a significant number of younger candidates in particular keen to work for employers that share their values.

But where to start? The issue with most ESG measurement frameworks is that they are geared towards the largest businesses – mainly because they are the businesses that are regulated. For a business which might have 50 employees, it’s extremely difficult to scale those frameworks down to fit their operations. A more suitable way of thinking about measuring ESG, and a good place to start, might instead be the ‘3 Ps’, which is a simple way of understanding the impact of a business on society and the environment:

People: The impact a business has on its employees, customers, suppliers, and the communities in which it operates.

Planet: The impact of a business on the natural environment, including its use of resources, its generation of waste, and its contribution to climate change.

Profit: The economic performance of a business, including its revenue, expenses, and profitability.

The 3 Ps are often referred to as the ‘Triple Bottom Line’, as they represent the three pillars of sustainable business. A sustainable business is one that is able to balance its social, environmental, and economic performance in order to create long-term value for all stakeholders. The 3 Ps are a practical and simplified way for smaller businesses to approach and measure their impact on society and the environment. This framework offers a more accessible starting point for SMEs that might find the traditional, more complex ESG measurement frameworks overwhelming or impractical to implement.

For those looking to take a further step, however, incorporating a slightly more comprehensive ESG framework can provide important structure and a basis to form goals, KPIs, and benchmarking. A framework will also help a company identify and prioritise their ESG risks and opportunities, development and implement strategies and initiatives, track and report on their ESG performance, and communicate their progress to stakeholders.

There are a number of different ESG frameworks available, and the best framework for a company will depend on its specific industry, size, and goals. Some of the most popular ESG frameworks include the Global Reporting Initiative (GRI) and the UN Sustainable Development Goals (SDGs).

The GRI provides a comprehensive set of ESG reporting guidelines that can be used by organisations of all sizes and industries. Many companies choose to use GRI standards for their ESG reporting due to the framework’s credibility, flexibility, and its ability to cater to a wide range of stakeholders.

The SDGs are a set of 17 global goals for sustainable development, and they can be used by SMEs to identify and prioritise their ESG efforts. These frameworks are not necessarily mutually exclusive – businesses may use both the SDGs and the GRI, for example, for different purposes or in complementary ways. For businesses looking to demonstrate their impact on overarching societal issues, the SDGs offer a comprehensive framework. In contrast, the GRI standards focus more specifically on reporting and disclosure guidelines, allowing for more granular and comprehensive reporting on specific business impacts, management approaches, and performance indicators.

Sitting slightly apart from these frameworks, another option – and significantly more in-depth – is BCorp or Certified B Corporation recognition. While, in theory, a business of any size can be awarded BCorp status, it is a far more rigorous undertaking for a small business. To be recognised as a BCorp, a business must undergo a comprehensive assessment and meet exacting standards of social and environmental performance, accountability, and transparency in their business operations and practices. The assessment can demand a significant investment of time and resources to gather necessary data, analyse practices, and implement improvements. Companies with dedicated teams or resources focused on sustainability might navigate the process more easily.

Overall, there are various options, but for most SMEs that aren’t required to follow a framework, most of the above might be overwhelming. For that reason, most are likely to benefit most from either following the SDG or BCorp framework or ‘cherry picking’ from the larger frameworks and creating their own. In fact, many SMEs are already doing so: this gives them the ability to tailor their ESG framework to their specific industry, size, and goals, as well as avoid the cost and complexity of using an existing ESG framework.

To develop their own ESG framework, SMEs should start by identifying both the regulations they need to abide by according to their industry and specific business area, as well as their stakeholders’ ESG priorities – are they a reduction in carbon emissions, waste recycling, or something more complex? They can then look at their current ESG performance – this will help them to identify areas where they need to improve and inform a benchmark they need to hit, before setting goals and targets that are specific, measurable, achievable, relevant, and time-bound. Once the all-important targets are set, they can then brainstorm and develop strategies and initiatives to achieve them, tailored to their specific industry, size, and goals. Finally, measurement is crucial – often what gets measured gets done. Tracking and reporting on their ESG performance will help them to measure their progress, stay accountable, and identify areas of ongoing improvement.

In this evolving landscape, SMEs must adopt a pragmatic stance towards ESG. It’s not only about compliance; it’s a gateway to operational improvements, financial resilience, and investor appeal. By starting now, forward-thinking businesses will set themselves up for success in a future where sustainable practices are fundamental.

SME Publications/ SME XPO 2024