Implementing ESG: A Practical Guide for Small Businesses
What is it?
Environmental, Social and (Corporate) Governance (“ESG”)
The acronym “ESG'' has become a buzzword and has evolved into several different meanings, depending on the context in which it is used. The most technical definition remains as follows:
The framework that enables stakeholders of a business to understand how the risks
and opportunities of sustainability issues are being managed.
The term ESG is also used generically and refers to the attention a business has over its impact on the environment and wider society. For investors, ESG is used to label the non-financial indicators of company performance; particularly those which correlate with a business’ resilience, success, and longevity in the market.
It is important to understand that a company dedicated to ESG is not expected to be diluting their focus on financial returns. Rather, these companies seek to achieve growth and profitability through increasingly sustainable means. They appreciate their responsibilities to wider society and the planet, and act upon them accordingly.
The following three sections will delve into the “E”, “S” and “G” components separately: what they are about, and examples of the common problems being addressed by corporations.
Environmental
The environmental component of ESG essentially tackles three separate issues of concern.
Anthropogenic Climate Change
Long-term increases in average global temperatures, attributable to human activities.
Pollution
Release of harmful products into the natural environment; typically, as the by-products or waste products of industry.
Depletion of limited natural resources
Includes fossil fuels as an energy source, raw materials such as minerals, and also reserves of water.
Below are just a few examples of the most common environmental issues a business will choose as the focus for the “E” portion of its ESG policy.
Climate Change Strategy
Biodiversity
Water and energy efficiency
Carbon Intensity/Footprint
Environmental Management Systems
Social
The social component relates to the way a business manages its relationships with customers, suppliers, employees and communities.
Below are just a few examples of the most common environmental issues a business will choose as the focus for the “S” portion of its ESG policy.
Equal Opportunities
Human Rights
Health and Safety
Child Labour
Freedom of Association (Union Membership and other Collective Action)
Involvement with local communities, such as through voluntary work
Corporate Governance
Areas of focus include compliance with regulations and the company’s business ethics. Businesses strive towards transparent governance, accurate accounting, and avoiding conflicts of interest or corruption.
Below are just a few examples of the most common environmental issues a business will choose as the focus for the “G” portion of its ESG policy.
Business Ethics
Board Independence
Executive Remuneration
Shareholder Democracy
Corporate governance is the part of ESG most likely to be neglected by businesses. This is particularly true of startups and SMEs; believing their relatively simple structure of governance as a reason to be complacent.
However, poor corporate governance can have the most immediate detriment to a business. Regulatory non-compliance can lead to hefty fines from the government, and unethical business practices can lead to bad press and reputational damage.
Why ESG is Important at the Startup Stage
Investors, particularly venture capitalists, are increasingly attracted to ESG-focused businesses. Many will screen startup companies based on their ESG credentials. Startups are judged at the outset when investors approach, as ESG-friendly startups convey a sustainable business model.
Consumers are now placing greater importance on environmental impact when choosing their brand allegiances. Industry surveys repeatedly show a willingness for consumers to pay a premium for goods or services which are perceived to be more environmentally friendly. The 2021 ESG Consumer Intelligence Series: PwC neatly illustrates the gulf between what consumers (and employees) expect from businesses, versus the current reality.
For workforces wishing to belong to ESG-friendly businesses, the commitment towards the “Social” element, typically sets a standard for working conditions and ultimately enhances employee satisfaction and motivation. Additionally, because ESG focus connotes business stability and longevity, it is easier to instil a workforce with a higher sense of meaning and purpose to their jobs and encourage high engagement with their work. Ultimately, by focusing on the social side of ESG, a business can improve upon both its talent acquisition and retention of existing employees.
For the companies themselves, they obtain the opportunity to tap into other markets. Potentially, this could increase the chance for your business to gain subsidies from the government. Most important of all, are the lowered costs and increased profits that result from development into a more efficient business.
How to focus on ESG
1. Identify which of the ESG factors are most applicable to your business sector. For instance, as a tech startup, the areas of data privacy and diversity metrics might be the most applicable. It is best to prioritise one to three high-value, yet low-complexity ESG issues.
The Sustainability Accounting Standards Board (SASB) assists businesses of a given sector in identifying and then reporting on their most relevant sustainability issues. Their standards for all 77 industries can be downloaded free of charge via Download SASB Standards - SASB.]
2. Create a company charter, which will formally commit the business to ESG practices in general, and also outline specific goals and strategies towards achieving them. See the following example of Vodafone’s 2018 “Social Contract”: A new social contract | Vodafone IR
3. Self-evaluation and comparison of your ESG credentials against competitors; ideally by using a respected rating system.
One example is by estimating your company’s carbon footprint, with a view to becoming a net-zero contributor to global emissions. The British Business Bank provides a useful summary of how to do this: How to measure your carbon footprint - British Business Bank (british-business-bank.co.uk).
Whatever aspects of your company’s ESG you are reflecting upon, be wary of using poor-quality data, which can lead you to make exaggerated claims. Accusations of “greenwashing” are likely to follow, and a perception that your company does not take its ESG responsibilities seriously. The best approach is for commitments to ESG to be framed as a work-in-progress, which will develop as the business grows; always including customers and investors in the conversation about how to be a sustainable enterprise.
“Early Metrics” methodology caters specifically for startups and SMEs, by utilising the company’s understanding of the startup ecosystem. Like most ESG ratings, EM’s are based upon the UN Sustainable Development Goals: THE 17 GOALS | Sustainable Development (un.org). More information about EM’s methodology is available here: Measure startup growth potential | Early Metrics > Startup ratings.
MSCI has created an AI platform, that uses public data to produce an ESG investment rating of a company, ranked from EEE to AAA (highest) ESG Investing: ESG Ratings - MSCI.
Perhaps the most well-known of the ratings agencies is B-Lab. They use a questionnaire-based assessment, allowing companies to be certified B-Corp, for two years. About B Lab UK - B Lab UK (bcorporation.uk).
- Author: Edward Bennet-Gibbon
- Author: Edward Bennet-Gibbon
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DISCLAIMER
This article has been written by law students for the sole purpose of providing informative insight. The information in this article is intended for educational purposes only and does not constitute legal advice, nor should the information be used for the purpose of advising clients. You should seek independent legal advice before relying on any of the information provided in this article.
Sources
Barney Cotton , 'Who are the Top 32 ESG pioneers in the UK?' (Business Leaders, 7 December 2021) <https://www.businessleader.co.uk/who-are-the-top-32-esg-pioneers-in-the-uk/> accessed 13 December 2022
Anais Descleves, 'ESG initiatives: how startups can improve their governance' (Early Metrics, 5 July 2022) <https://earlymetrics.com/esg-initiatives-how-startups-can-improve-their-governance/> accessed 13 December 2022
KPMG, 'A step-by-step ESG guide for Hong Kong-listed issuers' [2020] Integrating ESG into your business
Kyle Peterdy, 'ESG (Environmental, Social and Governance)' (Corporate Finance Institute, 24 November 2022) <https://corporatefinanceinstitute.com/resources/esg/esg-environmental-social-governance/> accessed 13 December 2022
European Commission, 'A European Green Deal' (European Commission) <https://commission.europa.eu/strategy-and-policy/priorities-2019-2024/european-green-deal_en> accessed 13 December 2022
Victoria Kirillova, 'ESG Investing in 2023: The Ultimate Guide for Startups' (Relevant, 30 November 2022) <https://relevant.software/blog/esg-investing/> accessed 13 December 2022
