By Rupert Bull, CEO and founder of data and assessment research platform, The Disruption House 

Small and medium-sized enterprises (SMEs) are facing increasing pressure to demonstrate their commitment to environmental, social, and governance (ESG) principles. This is because investors and lenders are becoming more interested in funding companies that prioritise sustainability, ethical practices, and good governance.

ESG has become embedded in businesses of all sizes with targets in some cases tied to growth, as they help build credibility and prepare for future environmental and social risks and attract investors.

With the Sustainability Disclosure Requirements (SDRs) coming into effect in the UK this year, ESG practices are very much part of the business landscape, particularly as investors and lenders are moving to invest and lend in socially responsible businesses.

The constantly evolving ESG landscape

ESG reporting standards have increased and in the UK especially, there are several new parameters for ESG reporting – such as the Companies Act – that can often be long winded and costly.

For SMEs working towards an economically and environmentally sustainable future, ESG assessment needs to be accessible. Today, there are several ways for businesses to evaluate themselves efficiently and cost effectively on their ESG goals using data. Data assessment and strategy assessment platforms that specialise in ESG are a great way for small or medium-sized organisations to kick off this journey. Ultimately, this allows them to self-evaluate, assess performance and set up the correct infrastructure for future legislation and changes to the business environment.

Reporting requirements have been increasing throughout the years and with the UK planning to make ESG disclosure mandatory by 2025, tools like these are helpful. They allow SMEs to show up as credible players in the market and set themselves apart with a socially responsible outlook that helps them survive difficult market conditions.

How SMEs can benefit financially from reducing their carbon footprint

To use ESG to secure capital, SMEs must first assess their current level of ESG performance and identify areas for improvement. Once the areas for improvement have been identified, SMEs can develop a plan to address them, such as implementing new sustainability practices or creating a corporate social responsibility programme.

A study by NYU showed that when companies focus on environmental, social, and governance concerns, their financial performance is impacted positively since it encourages risk management and innovation.

The same study showed that making sustainable decisions also means that SMEs can operate at lower risk  and innovate to produce better returns. This in turn helps them attract investment in a highly competitive market, as it enhances customer loyalty and reduces cost of capital, according to a report by Grant Thornton. Moreover, when it comes to securing loans, a statistical analysis by Bain & Co found that companies with strong ESG and sustainability practices are less likely to be in arrears and thus have a stronger credit score.

SMEs can also consider becoming certified by an independent organisation, undergoing a rigorous process to assess the company’s social and environmental performance, public transparency, and legal accountability to balance profit and purpose. This certification can be used to promote the company’s commitment to ESG and crucially attract socially responsible investors and consumers. For instance, as of last year, nearly over half of millennial investors admitted to investing more in businesses that reflected their values.

Not only is this going to be beneficial from an operational perspective, with better oversight allowing for more informed decisions to support with efficiency savings, but it will also be beneficial from an investment and credit perspective. This is as such validations and credentials will demonstrate that a business has independent and means tested validations for its ESG practices from reputable and recognised independent bodies.

Importance of an ESG strategy as a means for futureproofing

An ESG strategy reflects a business’ future preparation and ability to survive different market conditions. They directly and decisively help manage a company’s impact on society and the environment. Hence, it’s important for SMEs to have an ESG strategy as this demonstrates their ability to adapt to unexpected conditions in the future.

A more sustainable way of operating empowers SMEs to reduce risk and innovate to produce better returns. This in turn helps them attract investment in a highly competitive market, as it enhances customer loyalty and reduces cost of capital.

In today’s uncertain economic climate, using better ESG infrastructure can assist with protecting a company from future shocks or unexpected changes. As well as improving financial performance which ultimately can increase efficiency and resilience in the long term.

Navigating rough waters – ESGs to the rescue

SMEs that take social and environmental issues into account are more likely to attract customers and investors. By prioritising these governance and climate considerations, SMEs can foster an engaged and adaptable workplace that helps them sail through crises.

Recent events on the world stage have proved that sustainable practices and environmental, social, and governance (ESG) credentials are no longer just buzzwords – SMEs can benefit from integrating these principles into their operations. To navigate ongoing difficulties brought on by economic and environmental crises, SMEs must navigate the ESG landscape as well. This will equip them with the ability to manage future risks, innovate, and set themselves up for long term growth.