Written by Roy Fletcher
Published: 20 May 2022
What a mouthful. First, let me expand on the acronyms so that we have a shared understanding from the beginning of this article. ESG stands for Environmental Social and Governance frameworks and SME stands for Small, Medium Enterprises. I will expand on an approach/ argument that SME’s could take when faced with the realities that ESG presents in the current market.
According to Forbes, ESG issues were first mentioned in the 2006 United Nation’s Principles for Responsible Investment (PRI) report consisting of the Freshfield Report and “Who Cares Wins.” ESG criteria was, for the first time, required to be incorporated into the financial evaluations of companies.
Since then, for obvious reasons, the pressure has been on the value/ supply chains of these organisations to have some form of ESG reporting in place to qualify to do business with them, as the organisation in question will be rated on their score card by the quality of vendors and suppliers that they do business with. This is a great way (in theory) to put systemic pressure on the rest of the business landscape to fall in line. Practically, however, it is a far more complex issue to contend with.
For large enterprises, it has been put into practice, but for SME’s, it is a philosophical question, if even a question that they are willing to contend with right now. I don’t blame them. As someone who represents an SME, I went and found an online assessment that would give me an ESG rating. I spent about 30 minutes trying to make sense of what the forms were asking me for and found that the categories and required information would cost me time, effort, and resources to complete. So I closed the page and went on with my day. Even if I wanted to participate and do my part, the barrier to entry was too high.
I was still left questioning how I participate in these ESG practices, because I care about sustainability and would like to run a responsible business.
Below is the 6P Sustainability Model from the Good Growth Academy, which I think beautifully encapsulates the thinking and intention behind these frameworks and movements such as ESG.
As you can see, there are overlapping categories in each framework, so taking the first steps to doing your part as an SME shouldn’t seem so daunting. You have most likely been doing at least something related to one of the frameworks above. Now the question is, how to take it a bit further and formalise it in your business practices. I am always an advocate of taking the first steps to get going and figuring the rest out on the way. It’s a cowboy approach and may not serve everyone. Rather let’s assume, for the purposes of this article, that business owners in the SME category would like to preserve and protect the planet and its people, in a responsible way, but now need to figure out what it means practically for their business.
For this thought experiment I will use the SWOT analysis to anchor the thinking and give commonly understood language to the challenge. If we break the SWOT analysis into two parts for ease of understanding, we can say the O.T. (Opportunities and Threats) are external to the business and the S.W. (Strengths and Weaknesses) are internal to the business, where we have control. If you would like to know more about the SWOT analysis and its uses, you can read this Harvard Business Review article titled “Are you doing the swot analysis backwards”.
ESG has become a strategic choice and now we need to look at what it means practically for small and medium businesses. I will use the example of a small chocolate producer to play out this logic.
From an Opportunity perspective, the chocolatier can capture future value in higher margin chocolate products, for a sustainability conscious customer by making a relatively small shift in procurement. They can produce chocolates using ethically sourced cocoa beans (more on this found here). They are using the same product from a raw materials perspective, but with an entirely new market positioning for an entirely different customer segment. The cost of production may have gone up, but this customer is willing to pay a premium for a clear conscience while enjoying their favourite dark chocolate decadence.
From a Threats perspective, if the company does not start to comply with ESG (such as ethical supply chain practices), they may lose out on opportunities to grow by supplying large international retailers or defend their current market of existing resellers. This is a direct threat to their survival and should not be ignored.
With that very brief exercise in looking outward, they discovered something practical that could be done to remain relevant in a shifting business landscape which was to apply a different procurement strategy and practice.
From a talent perspective, they may very well attract a more environmentally conscious person who resonates with this new direction that the chocolatier is taking. Attracting and retaining the right talent, especially in today’s talent market, is tricky, and having talent that aligns to the organisation’s purpose and vision is a recipe for success, or at the very least, superior performance. I will talk more on this later in the article.
Now, the executive team of chocolatiers is looking inwards and unpacking their Strengths and Weaknesses. They have discovered that the new opportunities in the supply chain shift have presented them with a weakness in terms of specific talent capability and mindset in the procurement department. They have also discovered that a strength of theirs is optimisation and scale which leaves little room for further innovation or adaptations needed to seize future opportunities. The executives decide that their people are the key ingredient to executing on the ESG strategic choice.
S will be the focus for this chocolatier. If you would like to reach more about this, McKinsey have an article titled Emphasising the S in ESG. Briefly, some of the categories of the S in ESG (in no specific order):
- Diversity & Inclusion
- Relationships (with employees and supply chain etc)
- Community relations and human rights
- Workplace health and safety
With the chocolatiers choice to become a responsible chocolate maker by ethically sourcing their raw materials and innovating more in this category of product in order to serve a more discerning customer, the focus from a business perspective on the S makes total sense. Let me explain some practical steps that they can do to operationalise this strategy and get executing:
- Diversity & Inclusion shows a 20% increase in innovation. Read more here with Deloitte’s review on the Diversity and Inclusion revolution, and here on how to practically start measuring it in your organisation.
- Relationships: From an employee relationship perspective, understanding what drives employee engagement is a really good place to look when building solid relationships with your workforce. If you would like to understand that better, look here. There is a quote by Richard Branson that says, “take care of your employees and they'll take care of your business,” It is by this principle that a good employee engagement strategy will positively affect business performance, and its relationships. There is a resounding confirmation of this in the research.
- Community relations and human rights: Ethically sourcing raw materials and investing in the communities who supply these goods. If you would like to know more about ethically sourced products, look here.
- Workplace health and safety: As a producer of food products, there are robust governance and quality standards to which the company must comply, and active investment into improving these will result in consistent quality products being produced in a safe and healthy environment. ISO standards can be found here.
In conclusion: While the world is scrambling to make sense of ESG scoring and impact measures that are better suited for the SME ecosystem, responsible business owners can look to ESG as an opportunity to capture future value, whilst defending their current market, and participate meaningfully in the ESG movement for a better world. ESG as a strategic choice can be translated into an organisational mandate of sustainability driven by people.