ESG for small businesses: How to build and implement an ESG policy
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Posted: Wed 24th Apr 2024
ESG stands for environmental, social and governance. Delving briefly into its history will immediately provide valuable insights into why it's important.
Although ESG has been around since the 1960s, the first popular use of the term was in 2004 in a report called Who Cares Wins, a joint initiative of financial institutions at the invitation of the United Nations.
The UN Principles for Responsible Investment (PRI) require ESG criteria to be incorporated into financial evaluations of companies.
Increasingly, major institutional investors are making it clear they expect companies to hold ESG criteria.
We often think that investors are more concerned with financial performance and longer-term profitability than ESG considerations. However, ESG is closely related to risk.
Investors want to make sure they get good returns on their investments, but what happens when a scandal hits a larger company? Share prices fall, which can be disastrous for investors as recovery may be a long road.
Scandals could relate to the behaviour of individual board members, but could also relate to:
high or uncontrolled carbon emissions
pollution
resource depletion
lack of internal controls
poor diversity and inclusion practices
breaches of human rights and labour standards in supply chains
bribery
any number of other poor business or ethical practices
A drop in share prices is not generally relevant for small businesses, but anything that could be a potential risk to your reputation is.
Bad practices can have a very negative impact on any company’s reputation. And they could also be costly if you're breaching regulations.
Although ESG used to be predominantly relevant to the corporate world, over the last few years that has changed dramatically. Now embedding good ESG practices is increasingly essential for any size and type of business, from sole proprietors upward.
What is ESG?
ESG can be described as a framework to capture all the non-financial risks of a company’s day-to-day operations.
How can a small business implement an ESG policy?
Putting ESG practices and activities in place in a smaller business means doing the following:
Measuring and understanding: Assessing your current standing against ESG metrics
Setting out changes: Developing a strategy that outlines the adjustments you need to make to meet ESG standards
Rolling out changes: Implementing the changes detailed in the ESG strategy
Reviewing and amending: Making sure the changes implemented have been effective, or amending something in your policy
VIDEO: Implementing sustainable practices
Watch this webinar to understand the basics of sustainability and why some of the common myths about net zero need debunking:
What areas do you need to consider when building out your ESG policy (with examples)?
Environmental
With the constant rhetoric about reaching net zero, we might presume that's the starting point for considering environmental issues.
Yet the climate crisis isn't our only environmental concern, and a more rounded approach that looks at all aspects of a business's environmental responsibilities will have a greater effect.
This holistic approach, combined with better communication across all levels of society, can speed up the drive to net zero.
There's no one-size-fits-all for small businesses and so you must consider what your own impacts are. If you're working with limited resources, think about low-cost and no-cost quick wins.
If you have a bigger budget, consider actions that will have the most positive impact on the environment while also providing cost savings for your business with a good ROI.
Many small business owners work from home and think their environmental impact is so small that it isn't relevant. That's never the case. Small changes multiplied by five million small businesses can have a massive effect.
The best way to proceed is to sit down with your team (if you have one) and assess your sustainability performance. Think of everything you do in your business and what changes you could make. And do remember that those impacts aren't always immediately evident.
Examples of environmental factors in ESG
Your website has a carbon footprint, as does your business email. In fact, every online activity is powered by huge servers. Large downloads, high-res pictures, videos and bulky attachments use more power.
Do you know where the money in your bank accounts, personal pensions and workplace pensions is invested? Quite probably a portfolio of assets including stocks, shares and bonds may be supporting industries, such as fossil fuels, tobacco, gambling and more.
The purpose of this blog is not to provide a sustainability course but to encourage you to stop and think very clearly about what you can do to reduce your negative impact and increase your positive impact.
Environmental concerns you can address
Below are various environmental risks and concerns you should be addressing.
It isn't just what you do within your business, but the broader supply chain story of how goods are made, transported and used and end user's processes for waste management.
Climate change, particularly reducing carbon and other greenhouse gas emissions (or GHG emissions) rather than simply offsetting
Air, water and soil pollution
Depleting natural resources
Loss of biodiversity and destroying habitats
Generating excessive waste and disposing of it inappropriately
Social
A better word might be "people". And, as with the environment, this is more relevant to a small business than you initially might think.
Social stands for all the people your business interacts with (your "stakeholders"):
Employees (if you have any)
Customers
Local communities
People in your supply chain
Specific social issues:
Physical, emotional and mental wellbeing in the workplace
Human rights and modern slavery
Community and social impact
Many small businesses will say they don't have the time, resources or money to support their local communities. And yet many are often doing more than they realise.
Examples of social factors in ESG
A partner in a small firm of solicitors said they were a small team and they did not have time to dedicate towards their social responsibility. I suggested a few options that didn't require a huge amount of time:
Mentoring a young person for just one hour a month – "oh, we do that weekly".
Allocating pro bono hours – "yes, we do that too".
Becoming a trustee for a local charity – "all the partners do that for at least one local charity".
Offering apprenticeships or other training programmes – "yes, we always have trainees".
And so it continued. In other words, they were supporting their local community in a way that was appropriate for their business and impactful for the community they served.
The partner walked away feeling pleased with what her firm was doing and vowing to take a more strategic approach to community support in the future.
Consider how those activities – which they were very clearly enjoying – affect the business. Yes, better brand awareness and a great boost to its reputation.
Community support doesn't necessarily mean being financially philanthropic or volunteering (although, of course, both options are always welcome). There are other ways to get involved:
Payroll giving schemes
Work experience
Hiring employees from the local population
Buying from local businesses
Workplace collections for foodbanks, "smellies" for hospitals or domestic abuse centres, toys at Christmas time
Offering volunteering hours or match-funding employees' volunteering activities
Getting involved in large community events as sponsors or volunteer support
Street, beach or river cleans
Donating to charity goods you'd otherwise throw away (check out A Good Thing CIC, a fantastic platform that matches business waste with local charities' needs)
Communication inside and outside the business is essential to keep employees and other stakeholders informed, engaged and motivated. All these people need to know and understand your company values.
Governance
In the corporate world, governance generally relates to the board of directors. Here are some likely areas of concern in terms of ESG scrutiny:
Executive pay
Corruption
Political affiliations and donations
Board composition: Diversity, equality and inclusion
Tax strategies
Transparency
Auditing and compliance
There is overlap but governance in a small business is quite different. In most cases, the director (or directors) are actively involved in the day-to-day running of the company.
Good governance in a small business means:
operating efficiently
abiding by, or going above and beyond, the law
having appropriate systems in place
having clear lines of communication both inside and outside
It's about operating a business responsibly, efficiently and ethically.
Who should care about ESG?
ESG for start-ups
While ESG can be implemented within a business at any stage of development, it is easier to embed at the earliest opportunity.
For start-ups, ESG principles should be embraced in the planning stage to provide a firm foundation on which to develop the company.
ESG should be more than a plan or process. It should align with company values and, as part of the development process, start-ups should identify their values, purpose and shape their fledgling business accordingly.
If your start-up requires investment, ESG policies will be required. Many banks, even for a basic current account, require ESG considerations to be built into a business plan.
ESG for small businesses
Risk and reputation go hand in hand. For any small business to prosper long-term, it should embed ESG principles to make sure it's operating responsibly, efficiently and ethically.
ESG for larger corporations
While risk and reputation are a concern for small businesses, for larger corporates such concerns can be magnified exponentially.
Institutional investors, shareholders, NGOs, clients and consumers are continually questioning and challenging the ethics of big companies.
It's now widespread practice for large corporations to include ESG reporting in Annual Accounts. Failure to do so often raises concerns.
Full ESG reporting is not yet mandatory in the UK although Sustainability Disclosure Standards will be referenced in future mandatory reporting requirements.
However, since 2022, publicly quoted companies, large private companies and LLPs must meet mandatory climate-related financial disclosures.
Why is ESG important for small businesses?
ESG is important for small businesses for several reasons:
Risk and reputation
A benchmark for efficient, ethical and responsible practices
Potential future mandatory requirements
Enhancing opportunities for growth, investment, grants and awards
Customer/supply chain requirements. Whether you sell your goods or services to consumers, private or public sector, your ESG credentials are increasingly likely to be scrutinised
Attract the best talent
Build a business you can be proud of
Common mistakes small businesses make with ESG
Authenticity. Authenticity. Authenticity.
Small businesses are unique. While there may be common strands, there is not a one-size-fits-all benchmark for small businesses. Templates can be useful resources but they should always be used as a basis to develop plans and processes.
Similarly, while policies are useful and often a legal requirement, they have no value if merely downloaded from the web and your company name inserted.
Start or develop your ESG journey by carefully considering what is appropriate for your business. Ensure you are completely authentic in your approach and disclosures.
VIDEO: Why authenticity is the answer to your business's success
Watch this webinar to understand why authenticity is the answer to your business's success:
Avoid a tick-box approach at all costs as there may be short-term gain but long-term pain as your inauthenticity is uncovered.
And do ensure good communications internally and externally. Authentically engage your team, if you have employees when developing ESG policies and plans.
And please, if you've taken the right approach to embedding ESG principles and are authentically reducing negative social and environmental impacts and increasing positive impacts, do feature your actions on your website and social media.
If your customers want to buy goods and services from responsible companies, how can they make an appropriate decision if you don't authentically provide the information they may be looking for?
Relevant resources
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