A year ago, less than a third of small and medium-sized enterprises (SMEs) were familiar with the term ESG (Environmental, Social, Governance). Today, that awareness is increasing as many companies feel the growing pressure from multinational corporations, banks, and customers for transparency around sustainability. The question SMEs face is how to meet these demands in a way that is also economically viable.
Despite growing familiarity, many SMEs are still uncertain about ESG’s impact on their business. Statements like “it will hurt our business” or “just another obligation” reflect common concerns in the business community. For some companies, though, ESG principles have become an opportunity to improve resilience, lower costs, and open doors to new markets.
Rising Demand for ESG Consulting in SMEs
EnviTrail has conducted a number of ESG scan consultations with small and medium-sized companies that are starting to engage in ESG. Their motivations vary and can be divided into three groups.
The first (relatively small) group includes companies that, through their owner, consider sustainable business as the basis of their existence regardless of any legislative obligations, want to keep up with others, and moreover see business opportunities in this approach. These companies already have most of the documents and data required for ESG reporting.
A growing group is one that is motivated by the need to answer questions about their sustainability activities more frequently and from different quarters. Again, much of the data is already available in the company, but the company does not systematically capture and link it to sustainability activities.
The third group is made up of companies that usually do only the minimum necessary. Sustainability as such has not been a major topic for them so far, they are not familiar with the issue and want to educate themselves and analyse what to prepare for in the first phase. ESG in practice: companies do it, even if they say otherwise
ESG principles are often confused with CSR (Corporate Social Responsibility). While CSR focuses on voluntary activities and ethical behaviour, ESG represents specific and measurable standards that companies must meet, for example in the areas of environmental performance, employee relations or management transparency. Many small and medium-sized companies already do many of these things naturally, they just call it something else.
Perhaps the most typical example might be planting trees, either on company property (to spruce up the surroundings) or as part of a team building event. It is certainly a charitable and beneficial activity, but in terms of ESG, it is overwhelmingly insignificant in itself.
Simply put, ESG offers a view of CSR from the other side. In addition to the benefits to society, it emphasises that activities should have clear and measurable benefits for the companies themselves. An example is the financial literacy activities in schools in which some banking institutions participate. Here, pupils learn personal financial planning skills, which in future will provide banks with responsible customers who better understand investment and credit products. In this way, banks contribute to the stability and financial responsibility of the next generation, while also strengthening their ties with the community and improving their own reputation.
Many SMEs are investing in renewable energy, electro-mobility or measures to support the circular economy. This is often due to key survival issues – savings, innovation, customer requirements. Reporting thus provides them with a framework and focuses their attention on data-driven long-term planning.
Level playing field and safety: not just a priority, but a necessity
The main focus in SMEs is on social aspects such as employee health and safety, equal treatment and improving working conditions. In this, practical experience coincides with the survey results. Small companies often pay more attention to the working environment simply because in smaller companies people know each other well and are willing to help each other. This is also true for management, who realise how difficult it is to replace every worker.
This is why social issues are routinely integrated into the functioning of SMEs. Most of these companies focus on health and safety at work. Unsurprisingly, they emphasise creating a pleasant working environment and reject discrimination.
Energy savings as a way to a lower carbon footprint
“In our experience, a big issue is reducing energy consumption, in response to the price rises of the past four years.Companies are naturally pursuing economic goals, while increasingly available modern technologies and technical solutions also bring environmental benefits – in general, it can be said that reducing costs also means reducing the impact on nature,” comments Lukáš Ferkl of EnviTrail on the situation of small and medium-sized companies.
Energy savings directly contribute to reducing the carbon footprint – the less energy a company consumes, the less carbon dioxide emissions are produced. This approach is particularly important in the context of ESG reporting, where reporting on a company’s carbon footprint is a key parameter. For small and medium-sized companies (as well as for companies that have to report ESG and have less than 750 employees), it is essential to have a calculation at least in the so-called scope 1 and scope 2 – i.e. direct emissions from burning carbon fuels and indirect emissions from energy purchases (i.e. categories that the company can influence). And it’s not just about the actual number. What is important is demonstrating a decline in emissions over time. Given the “decarbonisation” investments that have already been made, companies should choose the right reference year to effectively report on the actions already taken in the past.
How to approach ESG in SMEs?
Small and medium-sized companies with fewer than 250 employees will increasingly encounter ESG issues. It is not always easy for companies to identify ESG topics to focus on at the outset. Inspiration on how large companies with reporting obligations address the same issue could help in this case. This is the process of so-called dual materiality or materiality analysis (we wrote more about dual materiality here). For the purposes of SMEs, a simplified form that is built on is sufficient:
- Finding out what key partners want or will want from the company,
- understanding why they want this information from me,
- analysing the risks and opportunities arising from the requirements identified above,
- Formulating strategies, metrics and objectives on the selected topics,
- setting up a consistent reporting format for the needs of key partners.
“This process will not only help the company meet the requirements of business partners, but can also bring many useful changes. By implementing modern technologies or improving certain processes, a company can operate more efficiently, save money and even find new ways to expand its business,” explains Petr Ondráček of EnviTrail.
ESG: Not just a green future, but also tough decisions
One of the main obstacles why companies often don’t put more emphasis on sustainability is the uncertainty of whether investing in ESG will be worthwhile at all, as well as the fear of not having enough money or information to do so. This is quite logical in a situation of turbulent change. Concerns are often expressed that investing in sustainability will not bring the expected benefits and this will hinder further development and innovation. Therefore, when considering ESG investments, most companies focus on reducing energy consumption.
Companies are also often discouraged by the bureaucratic burden of ESG implementation. Some corporate ESG questionnaires do not take into account the specificities of SMEs, tend to be extensive and require detailed information. Unlike large corporations, SMEs cannot afford to have a team of specialists to deal with ESG issues in detail.
Not surprisingly, there is a growing call for simplification of processes so that SMEs, which are not the primary focus of ESG reporting, do not have to spend time and energy producing complicated reports.
How to get started: Areas of greatest impact and simple data collection
While SMEs do not have to report directly under ESG regulations today, the role of these companies within value chains is significant and can impact their long-term performance. Companies that realise this early on can better manage potential risks and take advantage of the opportunities that ESG brings. “To get started, we recommend that companies focus on three main areas: identify key environmental impacts, simplify the tracking of energy consumption and emissions, and set up a simple data collection system,” concludes Petr Ondráček of Envitrail. “This approach will facilitate reporting in the years to come.” As a first step towards preparation, the use of an ESG scan, for example, can help companies quickly identify areas with the greatest environmental and social impact.