Why Smaller Companies Need a Credible ESG Program
There is a clear moral rationale for embedding ethical business practices into decision-making. An enterprise environmental, social, and governance (ESG) program is one way to go.
For both consumer facing brands and those with B2B customers it’s becoming a necessity for remaining competitive as price, quality, and service parity grow.
Historically thought of as a “nice to have” for smaller companies, consumers and the market are now demanding that you have a credible take on ESG, and the earlier you start, the easier the work becomes
The World Needs It and So Do Your Customers.
You may already know the many frightening realities related to the increasingly likely pictures of future life on this planet - global climate disruption, ballooning inequality, rapid loss of biodiversity, dramatic technological shifts. This blog isn’t about those - the science and data about them is increasingly aligned.
You probably also know families just like yours and mine, all around the world, need real action on environmental and social issues that are relevant to your business. For many of us addressing these issues is the calling of our lifetime. For some it’s increasingly the admission that must be paid for continuing to meet the requirements of your customers.
The Business Case for ESG Programs
Lots of businesses that we talk with come to us with a common perception - sustainability and ESG work is simply a cost center. They don’t see the return on investment or business case for allocating scarce resources on credible action for these material issues. There are often many competing priorities for budget. There are better ways to evaluate true costs and benefits of ESG and sustainability but that’s for another blog.
I like to flip this question and look at the costs of not having a legitimate ESG program. Here are four risks companies may face without a defensible framework in place:
Business valuation and IPO/acquisition readiness
Legitimate and hard-to-replicate programs make companies stand out. According to EY’s Survey in the article “How ESG Disclosures Impact IPO Valuation,” 82% of respondents identified ESG as important in strategic decision-making.
Additionally, a credible ESG program will be increasingly important for SMEs interested in positioning themselves for strategic acquisition by a larger company or eventually going public via initial public offering. The application of artificial intelligence and machine learning (AI/ML) to quickly evaluate the integrity of ESG programs means that red flags will be far easier for potential investors to identify.
Legal vulnerability and increased regulation
Regulatory authorities are beginning to demand ESG disclosures from companies trying to go public. Simultaneously, legislation is catching up with illegitimate claims. Take, for example, the recent UN Environment Programme (UNEP) report showing that climate litigation has doubled over the past 5 years.
Consumer demand and increased skepticism
As the legal landscape gets more sophisticated, so does the consumer’s ability to see through false marketing. It’s widely known that most consumers value sustainability, but unless it’s authentic, it could backfire. In this Harvard Business Review from 2022, people can tell if a company is actually implementing against their goals. Customer satisfaction levels suffer when a company is perceived as greenwashing.
Failing to meet requirements throughout the entire value chain
Many smaller businesses are part of someone’s value chain. As larger companies continue to face investor and legal pressure to disclose their impacts they are looking to their suppliers to provide information about their ESG efforts and then eventually take action on these issues. A company’s supply chain often represents the largest source of environmental and social impacts associated with the brand, product, or service. That means if they aren’t already, your customers will be asking you about ESG soon.
Credible ESG programs increase a company’s viability.
The sooner these programs are woven into the larger business strategy, business operations, and supply chain, the more effective and innovative they can be. We’ve worked with global sourcing companies, beauty brands, and tech start-ups to think through how to build a credible ESG program that meets the needs of their investors, consumers, and B2B customers.
Schedule a discovery call if you’d like to understand your company’s specific vulnerabilities and opportunities.