SMEs get on board with ESG

In this opinion piece, James Hadfield, Partner at accountancy firm Menzies LLP, explains why SMEs might consider investing more in ESG reporting.

For all companies, regardless of size, Environmental, Social and Governance (ESG) strategy is becoming more important to their continued success. As public awareness of issues such as climate change increases, businesses and consumers are more likely to consider a company’s ESG performance before choosing to buy their products or services. So should SMEs be investing more in ESG reporting now?

Due to the growing conversation around the environment and the ethics of large corporations, in particular, the UK Government requires larger entities to report on their ESG strategies. While the requirements are currently heavily weighted to listed companies, there are now some reporting requirements for larger private companies and it seems likely that in the future these requirements will trickle further down to SMEs.

So for SMEs, focusing on ESG now will not only ‘future-proof’ their reporting, but more importantly, may also help to promote their environmental and social credentials to a wider audience.

Obviously, the first step should be to put in place a comprehensive ESG strategy. Many smaller businesses do find that they are already investing resources in activities which have a positive environmental and/or social impact. Of course, taking the step of putting written details into the public domain creates a commitment against which a company can be measured, therefore it is vital that decision-makers follow through on their plan and make sure it is communicated throughout the business.

There are numerous benefits to having an ESG strategy and making it part of an SME’s corporate reporting, a major one being to increase engagement with many key stakeholders. It is now more common practice for businesses to ensure that suppliers and customers have an ESG strategy in place before choosing to do business with them.

Employees are increasingly more likely to focus on a company’s ESG activities when choosing which company to work for, so publicly available information on ESG could help to differentiate the business in a competitive jobs market. At a time when many businesses are struggling to attract and retain talented people, a commitment to ESG is moving up the boardroom agenda.

Increasingly, investors are seeing some form of ESG strategy as a “need to have” rather than a “nice to have” in order to de-risk and future-proof their investment.

When considering reporting on ESG for the first time, SMEs should seek advice from an audit professional, preferably one that has a good understanding of the business and its market already.

The International Sustainability Standards Board (ISSB) has recently published comprehensive guidance on how large corporations should be reporting their ESG strategy. While these have yet to be officially adopted, the UK Government has recently announced that it intends to incorporate them into their existing framework in the future.

Rather than follow this very detailed guidance to the letter, however, SMEs could use them as inspiration to gather ideas about how they might enrich their reporting to reflect their ESG performance. It is also worth consulting existing requirements and guidance for larger entities to get a better understanding of what might be required for SMEs in the future.

Some key elements that SMEs might include when creating an ESG report is a narrative overview to explain their overall approach and the actions they are taking to improve their performance in this area. Where possible, KPI metrics should be included to show year-on-year trends, as these will demonstrate the positive effects that the ESG strategy is having. For example, details of a company’s energy consumption and carbon emissions or details of supplier payment terms.

Being environmentally and socially conscious is increasingly important to all businesses, not least SMEs and for many, it is a core element of their brand identity. As well as demonstrating a willingness to do the right thing, SMEs should consider going a step further by making sure that they have a formalised policy in place and communicating their ESG performance in an engaging and transparent way.