Many small- and medium-sized entities (SMEs) have long been able to operate under the radar when it comes to environmental, social and governance (ESG) primarily due to a lack of resources.
As a result, they have been slow to put sustainability at the core of their operations.
But if they don’t start making small steps towards greater sustainability they could find themselves struggling to attract the best staff, maintain strong supplier relationships, raise finance and maintain a strong brand.
Larger corporates may have an easier path to reach globally accepted sustainability goals. Listed and larger unlisted companies can afford diversified boards and independent remuneration committees. They can measure, verify and report on waste management, water efficiency, emissions and other ESG characteristics.
But for an SME the ESG journey has many roadblocks. These companies are often owned by a combination of founders, private equity firms, family offices and management. Smaller unlisted companies cannot necessarily afford large independent boards, independent remuneration committees and audit committees.
They often do not have to comply with all the regulatory requirements of a larger listed company or follow King IV corporate governance standards to the letter. Additionally, when it comes to governance, nonexecutive directors are typically shareholder representatives who cannot be seen as truly independent given the material shareholdings in the business.
And research on, and adaptation to, sustainable products is often too costly for smaller companies.
But these companies will have to recognise ESG and embrace sustainable practices if they want to grow in the shifting economic landscape.
The good news is that they don’t have to replicate the larger company structures and ESG application methodologies. There are simple but profound steps they can take to begin the ESG journey. What is most important is that they need to make a start with cost effective strategies that have a big impact.
SMEs do not have to measure and report on all of the metrics, such as board composition, diversity, ethics policies, carbon intensity, energy efficiency, waste management and community engagement. Rather, they should focus on the key factors that are material to their core operations.
Demonstrating how you are contributing to and enhancing the community that the business operates in is another way to create goodwill
Another step towards transparency can be achieved in the form of policies or values statements that communicate intent and the goals of the business. This should appeal to potential investors, customers and clients.
This greater transparency is a big win for smaller companies and has the potential to dramatically improve branding and perception. Most significantly, the consideration of ESG factors as part of an overall risk management exercise can be revealing. It can save costs and direct executive resources where they are needed in the business.
Demonstrating how you are contributing to and enhancing the community that the business operates in is another way to create goodwill, attract capital, attract and retain staff and make an impact as a good corporate citizen.
SMEs have at least one advantage as a major creator of jobs in that they can easily measure the societal impact of additional job creation.
In partnership with the National Treasury’s Jobs Fund, Ashburton Credit Enhanced Funds were developed in this context to unlock private and public sector savings and direct them at the SMEs directly or via intermediaries.
So far more than 30 companies have been directly funded and thousands of SMEs indirectly funded while creating 17,000 jobs in the past six years.
• Nagel is credit portfolio manager at Ashburton Investments
