The role that small and mid-sized companies play
The role that small and mid-sized companies play in creating jobs, driving innovation, and leading the GDP growth of pretty much every developed economy in the world is well known to us all. As are the traditional challenges they face; managing cash flow, keeping up to date with new technology advancements, a lack of dedicated resources and attracting investment are just a few challenges on a very long list. But I would argue that the new kid on the block – ESG Strategy – has the potential, when fully addressed, to offer small and mid-sized companies a real and distinct competitive advantage.
Clear benefits of early action
The financial, risk and reputational benefits that can be realized by paying early attention to developing an ESG strategy are substantial. Moreover, with many SMEs delaying their ESG plan to tomorrow, those that steal the march will be best placed to prosper – and just as importantly, avoid the worst-case scenario of having to scramble around putting a rushed ESG framework into place when new ESG regulations do take effect or an investor calls to ask for their ESG plan.
Supported by independent research
The World Economic Forum estimates that more than 25% of a company’s market value is directly attributable to its reputation – and the plight of companies that fail to meet the required ESG standards that society expects is becoming familiar to us all. Under mounting pressure from the public, governments worldwide have implemented nationwide Environmental, Social and Governance (ESG) standards. For the most part, these national standards are applicable to larger companies. However, we are seeing a general rise in reporting standards for small and medium sized businesses with investors starting to analyze the risk profile of SMEs in much the same way that they evaluate large companies; a trend that will only gather pace over the next few years. Raising funding as a small or medium sized company is no easy feat. It’s hard enough to report on financial performance, let alone on issues such as your carbon footprint or your business continuity plan should another Covid variant emerge. Private Equity and Venture Capital companies – a vital source of funding for companies in the small and medium segment – use several ESG metrics to determine physical and transition risks (including market, regulatory and technology risk) and other aspects of a company’s ESG program and strategy and make their investment decisions accordingly.
Where to from here?
With the case for ESG made, let’s move on to the next step – namely, where to start? ESG is a wide playing field, and it can be overwhelming. Research shows that companies that have an ESG framework that addresses ‘material’ ESG factors – i.e., the governance, sustainability, and societal factors likely to affect the financial condition or operating performance of a company – significantly outpace the market (Khan, Serafeim and Yoon).
The ESG framework is comprised of Environmental, Social and Governance factors. To get started on the ESG plan, review your organization against the framework to establish direction and priorities, and help to define what it will take to achieve competitive advantage and future business success.
Environmental Risks
These include climate change mitigation, green- house gas (GHG) emissions, water security, waste, pollution, resource utilization and deforestation.
Social
Risks
These include inequalities, diversity & inclusion, employee relations, health & safety and working conditions.
Governance
Risks
These include executive remuneration, board diversity and structure, donations and political lobbying, and bribery and corruption.
And remember, spending time on this today will bring significant first mover advantages to your organization!
ESG Risk Guard is an ESG Strategy and Risk Management consultancy founded out of a desire to assist companies in navigating the ESG landscape while preserving financial health and wellness and benefiting the planet in a way that is specific to their organization.
