There are many terms and acronyms bandied about in the financial media. Often, they come with a significant amount of assumed knowledge attached. ‘ESG’ certainly fits into this category. But what does ESG stand for, what does it mean, and how does it relate to SMEs?

The acronym ESG stands for Environmental, Social and Governance. As a concept, ESG was first used in 2005. It described issues relating to Environmental, Social, and Governance impacts on business from a risk valuation perspective. Investors calculate the value of a company by considering all business aspects, including risks. ESG factors were intended to be inputs, not to describe the outcome. 

Today, the term ESG is used in many formats. It can be a noun or an adjective describing a business’ focus on certain issues. These issues are usually in the context of strategy or purpose. ESG strategy mainly results in frameworks to measure performance. 

It’s also not uncommon to see the term ESG equated with aspects of sustainability. After all, sustainability is defined in the Cambridge Dictionary as “the quality of being able to continue over a period of time”. From a business perspective, this defines a business’ purpose. It provides a basis for your social license, described by Investopedia as “the ongoing acceptance of a company or industry’s standard business practices and operating procedures by its employees, stakeholders and the general public.” Or as McKinsey put it, it’s the perception that your business “is acting in a way that is fair, appropriate and deserving of trust”. 

ESG and Sustainability – Acting on your Intent

To move forward with sustainable strategies, it’s helpful to take a small step sideways first and consider purpose. Your business’ purpose is the reason it exists, beyond making profit. What good are you hoping to give to the world? Why does your company deserve its social license to exist? 

If you mean your business to have a positive impact on the world, then by default, you are probably considering how to do this in a sustainable way. Embedding sustainability is about making sure that as you do whatever you do with your purpose in mind, you do it in a way that isn’t taking more from the planet or society than you’re giving back. 

An ESG strategy describes the way that your business is going to do this. 

If you can find ways to be more environmentally friendly, it is beneficial. Perhaps by reducing paper waste, or by looking for ways to reduce transport, heating, or electricity use. You would be making an “E” commitment.  

Making sure that your workforce is as diverse and inclusive as it can be is important. Sometimes, it’s a challenge for a small company of one or two people. Additionally, looking for ways to give back to society – perhaps through charity – means you are making a positive “S” impact. 

And if you’re able to describe your sustainability strategies in an open way to all your stakeholders, you will succeed. Alongside this, holding yourself (as a business and as a director) accountable ensures that you’re doing it in a “G” way. 

If you can incorporate ESG strategies and sustainability into your business while you are in the smaller end of the SME scale, it’s advantageous. These strategies will develop and evolve as your company grows. Add to this the competitive edge and resilience that an SME can gain through investing in sustainability. Consequently, ESG strategies become more of a ‘must have’ instead of a ‘nice to have’ within a business’ plan.

Sustainable practices come full circle back to ESG 

Investors need to understand why a business is pursuing ESG commitments and recognize authenticity. Your ESG strategies should not be simply ‘window dressing’. If your purpose is sustainable and serves the interests of all your stakeholders – including your employees, your clients, community, and society at large – then you will be inherently building an ESG framework into your business strategy. 

Does it matter whether you use the terms ‘ESG’ or ‘sustainability’ when it comes to your business strategy? Not really – the distinction between the two is constantly blurred. Ultimately, as long as your intent (purpose) is sustainable, your goals (strategy) will have an ESG focus. Consequently, you will be doing well by doing good.

Thanks to Cathy Oh from Tanamera Ltd for this article.

Further reading:

The importance of ESG for SMEs – HSBC 

ESG for SMEs: How Small- and Medium-Sized Businesses Can Embrace ESG for Long-Term Growth – Triple Pundit

ESG for SMEs: The practical steps – MoneyLive