ESG helps SMEs improving their resilience
This article first appeared in the Q1 2022 issue of the SID Directors Bulletin published by the Singapore Institute of Directors.
The Covid-19 pandemic has hit smaller businesses especially hard, and many are still in survival mode. The 2019/2020 Singapore Business Federation National Business Survey found that 76 per cent of small- and medium-sized enterprises (SMEs) surveyed felt little to no impact from the growing focus on climate change and environmental sustainability.
As boards reassess their business models, having an environmental, social and governance (ESG) policy provides an opportunity to adapt and stay ahead of the competition. Apart from the obvious reason to commit to sustainable development for environmental and social concerns, the motivation to set up an ESG policy becomes clear in the context of the stakeholder ecosystem.
Incentives for setting up an ESG policy
The corporate world is moving from the shareholder to the stakeholder model. Early adoption can differentiate an SME, bring advantages compared with its competitors, and drive innovation for sustainable solutions. Sustainability increases resilience in the following ways.
First, sustainability compliance enables greater access to finance, as investors scrutinise ESG performance in financing assessments. On the flipside,
companies that are not compliant may be penalised. SMEs that supply to multinational companies may find their ESG policies in the spotlight as a condition for doing business. Suppliers respond more readily to sustainable supply chains and companies with good ESG ratings.
Second, adopting sustainable business practices helps align business operations, e.g. reduced energy consumption and waste reduction help improve profitability and optimise resources.
Third, stakeholders are demanding sustainable business practices. Employee retention and commitment are improved with better work conditions, fair wages, safety and security at the workplace, and non-discriminatory practices. Customers are also factoring ESG into their purchasing decisions.
Increasingly, as governments, private and public institutions commit more resources to building
a low-carbon future, companies, even smaller ones, must take on sustainability as a strategy to future-proof their business.
How to get started
The commitment for ESG has to start from the top, with the board, CEO and senior management. For a start, defining an ESG
policy can help chart out the key sustainability areas for the company. SMEs at different stages of the sustainability journey will have varying priorities.
Resources include the 17 Social Development Goals (SDG) of the United Nations and the Global Compact Network Singapore’s SME Guide to Corporate Sustainability. When identifying the key areas of focus, the company’s values, strategy, operations, geographic footprint and risk appetite have to be considered. 73
For example, SMEs in the food and beverage industry can look at responsible consumption and production, good health practices, sanitation, gender diversity and climate action. While similar to large businesses, SMEs that ensure a people-first ESG policy can involve the local community and build employee and customer loyalty more readily.
Once the policy has been defined, ESG needs to become part of the organisational culture. Everyone in the company should be involved and included as applicable to their respective roles, more so in smaller businesses. The policy has to be made transparent and communicated effectively, and resources for training, staffing, tools and measurement metrics have to be allocated.
Under the Enterprise Sustainability Programme launched by Enterprise Singapore in October 2021, SMEs can tap on government grants of up to S$180 million to support training workshops, capability and product development projects, and key enablers such as certification and financing. See box, “Key Components of Enterprise Sustainability Programme”.
Depending on the nature of measures, some rewards, like reduction in energy consumption, can be realised relatively quickly, while others may take effect over a longer period.
Progress and outcomes should be measured regularly and reported for all stakeholders – internal and external. There are various tools available, for example the SDG Monitor which is an easy-to-use tool for linking actions to the SDGs and creating dashboards with the progress for monitoring and communication.
SMEs should prepare for increasing pressure on sustainability issues from all their stakeholders – investors, customers, employees and communities. Boards can help by evaluating the sustainability risks of the business, from physical proximity to regulatory changes. The designation of a Chief Sustainability Officer or a board committee can help ensure that ESG is firmly embedded in the boardroom agenda.
The 2021 Singapore Directorship Report by SID found that only eight firms have a board-level sustainability committee, and all of them were large firms, with capitalisation of S$1 billion and above. It is time that SMEs start their sustainability journey and make an impact.
Regardless of size, ESG must be integrated into the company values and organisational culture for long-term sustainable growth.