A different kind of business transformation

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By some estimates, more than 90% of global organizations are small and medium-sized enterprises (SMEs), the backbone of the global economy. As such, they have a vital role to play in promoting sustainability, social justice and responsible business for the good of their wider societies.

Forward-thinking SMEs are thinking about how environmental, social and governance (ESG) factors will affect their business. Although not yet scrutinized for ESG factors like their larger counterparts, SMEs that run sustainable operations can gain a competitive advantage in their market.

Looking more closely at ESG criteria, some relate to how any responsible company should operate. The good things in terms of ESG are also often the good things in terms of growing and sustaining a business – SMEs can do well by doing good.

What is ESG? Let’s break it down:

  • E corresponds to the environmental criteria and takes into account the performance of a company as a guardian of nature.

  • S stands for social and examines how an organization manages relationships with employees, suppliers, customers and the communities in which it operates.

  • G is for governance and relates to how the business is run.

Good governance ensures that a business is well managed, compliant and financially sound. Social factors promote better relationships with communities, customers, suppliers and employees. Adopting environmentally friendly working methods can help a company reduce waste and become more efficient.

SMEs are already thinking about sustainable development

Why would SMEs prioritize ESG, especially when trying to keep their heads above water in an environment of rising inflation and economic uncertainty? The simple answer is that companies of all sizes are under pressure to show how they manage climate risk and manage ESG.

Those who do not do the right things in environmental stewardship, diversity and inclusion, or social responsibility could suffer reputational damage. Depending on their size and industry, they may face legal or regulatory consequences if they fail to meet their ESG responsibilities.

Additionally, most large companies screen their supply chain partners to ensure they meet basic ESG criteria. SMEs that do not comply with the standard risk losing customers or suppliers. Additionally, investors and banks will increasingly add ESG credentials to their criteria when investing or lending to SMEs.

An opportunity, not a compliance burden

Proactive SMEs recognize ESG as an opportunity. Those who incorporate good ESG practices into their business can improve their brand and reputation in the marketplace. Since we can expect more regulation, especially when it comes to carbon emissions, they also have the opportunity to get ahead.

SMEs that put their ESG narrative into practice can also gain an advantage in recruiting talent and winning over customers, especially young people.

ESG is a complex field, which means getting it right, like digital transformation, will be a multi-year journey. The average SME has a lot to think about, but now is the time to start. A good place to start is to identify where your business can make a difference. Is there a way to reduce the energy and materials used to save money and help the climate?

Choosing realistic and measurable goals – and working towards them – will put you on the right path to becoming a sustainable business in every sense of the word.

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