ESG Can be a Value-Driver for Small Businesses

There was a time when environmental, social and governance (ESG) was seen mainly to help investors and other stakeholders understand that the organizations, they aligned themselves with were doing good things for the environment, following the rules and treating their people well.

The term “ESG” has become more ubiquitous in recent years as companies of all sizes work to manage the risks and leverage the opportunities associated with environmental, social and governance. Think of it as a holistic view of sustainability that encompasses—but that isn’t limited to— the energy your company takes in and waste it discharges; your commitments to human resources diversity and inclusion; and any internal practices, controls, and procedures that your company operates on.

Look at ESG as a Value-Driver

With more consumers and business partners seeking out socially conscious organizations to buy from and work with, small businesses are well positioned to turn ESG into a value-driver, but only if they view it as such.

“To stay competitive, SMEs should ensure they are advancing their ESG initiatives and reducing their greenhouse gas emissions,” TriplePundit points out. For example, Canada’s carbon pricing system has created a market for reducing greenhouse emissions (GHGs) by placing a monetary value on the cost of pollution.

Since 2019, every jurisdiction in Canada has had a price on carbon pollution. The Government of Canada sets minimum national stringency standards that all systems must meet to ensure they are comparable and contribute their fair share to reducing GHG emissions.

The federal pricing system includes a “fuel charge” on fossil fuels (e.g., gasoline and natural gas). “By making choices that reduce their emissions,” the Government says, “Canadians can avoid paying the price on pollution while still collecting the full Climate Action Incentive payment.”

ESG Doesn’t have to be Expensive

Companies may not always recognize that when they upgrade to modern, energy-saving lighting fixtures or build out a more diverse workforce they may wind up saving money or earning more profits in the long run. Smart companies look at the total cost of ownership (TCO) of that upgrade, policy change or other decision, and effectively turn those practices into value drivers.

Having a strong ESG proposition helps companies tap new markets and expand into existing ones, according to McKinsey & Co. It can also help companies reduce costs, offset rising operating expenses and increase operating profits by as much as 60%, the global consultancy reports. “A stronger external-value proposition can enable companies to achieve greater strategic freedom [and ease] regulatory pressure.”

Here are four more benefits that small businesses can expect from their ESG investments:

1. Better competitive advantage. According to EY, 61% of Canadian consumers will pay more attention to the environmental impact of what they consume. These customers want to buy from companies that are transparent about their environmental impact while behaving ethically and manufacturing sustainably. This presents a great opportunity for small businesses that may want to use ESG to get a leg up on their competitors.
2. Attract new investors or lenders. TechTarget says the inclusion of ESG reporting in earnings reports is trending among businesses. “Investors and lenders are becoming highly attracted to organizations that invest in ESG and use ESG disclosures to shed light on their sustainability efforts,” it points out. “A recent Gallup study found that 48% of investors are interested in sustainable investing funds.” If you’re taking on new investors or applying for a loan in 2023, putting your best ESG foot forward may result in a positive outcome.
3. Build more customer loyalty. According to Accenture, 50% of global consumers realigned their priorities when shopping for brands as a result of the COVID-19 pandemic. “These consumers are willing to pay extra for brands that are aligned with their values and are more loyal to those that treat people well,” TechTarget says. “Today's socially conscious consumers want to know what the businesses they support are doing for the greater good.” Small businesses can build loyalty with their customer bases by being transparent about their ESG efforts and communicating these accomplishments via their marketing, advertising, and social media channels.
4. Save money now and over time. Adopting ESG principles doesn’t have to be difficult or expensive. You can start lowering your business’ operating costs by reducing waste, using energy-efficient equipment and/or adopting environmentally friendly production processes. These cost savings can then be passed on as lower prices to customers and/or reinvested in innovative products. “In addition, while sustainability initiatives often result in upfront capital expenditures,” TechRepublic says, “they usually also deliver long-term benefits such as a competitive advantage, productivity gains and reduced risk exposure.”

By incorporating ESG standards into your business model, you can demonstrate social responsibility to customers, business partners, investors, and other stakeholders. Even small steps in this direction will add up over time and position your company as a socially conscious organization that more people will want to do business with.

This article is intended for general informational purposes only and does not constitute legal advice or an opinion on any issue. It should not be regarded as comprehensive or a substitute for professional advice.