November 2023

The Rising Importance of ESG in Business: A Sustainable Future

The Rising Importance of ESG in Business: A Sustainable Future

By Andrew Culley

Recent years have seen Environmental, Social, and Governance (ESG) gain significant prominence in the world of business. Companies are increasingly having to recognise that their responsibility extends beyond just generating profit; they must also consider their impact on the environment, on society, and the way it manages itself through corporate governance. This shift has been driven by a growing awareness and insistence amongst the markets, customers, and employees that a company must act ‘ethically’. This in turn has led to the integration of ESG principles into business strategies, marking a critical milestone in corporate sustainability efforts. However, it also marks a divide. While larger corporate companies have been able to mobilise resources to embrace ESG, many within the SME community are struggling to do so. But it's worth persevering.

ESG provides a framework for evaluating a company's performance in three key areas. The environmental looks at the company's impact on the environment and includes considerations such as carbon emissions, resource usage, waste management, and efforts to reduce their carbon footprint. The social element encompasses a company's relationships with its employees, customers, communities, and other stakeholders. Here employment practices, diversity and inclusion, safety, and community engagement are all considered. Governance assesses the systems and practices that guide a company's decision-making processes and overall management. This involves examining ethics, transparency, and adherence to legal and regulatory requirements. Many of these considerations have been around for centuries, and most companies would generally prefer to ‘do the right thing’. But increased public and legal scrutiny has intensified the ESG imperative for everyone.

There are compelling business reasons for embracing ESG. Firstly, by addressing environmental and social concerns, companies can reduce their exposure to legal, reputational, and operational risks. Secondly, it attracts capital as ESG performance is increasingly a factor in investment decisions, especially with institutional investors such as pension funds and asset managers. Then there is regulatory pressure, with governments across the world implementing stricter environmental and social regulations that require companies to proactively address ESG issues. More positively, ESG can drive competitive advantage: a strong ESG focus can lead to innovation, operational efficiency, and cost savings while also enhancing a company's reputation and market position. Finally, and crucially, there are stakeholder expectations. Consumers, employees, and communities are simply more ESG conscious, actively seeking out companies that align with their values and contribute positively to society. This makes it imperative for companies to adopt ESG principles and integrate them effectively into their business.

To do this, there are several steps businesses should take but it all starts with the absolute commitment of senior leadership: CEOs and boards of directors must actively champion the company's ESG efforts and set the tone for the whole organisation. This filters down to engaging a broader range of stakeholders, including employees, customers, investors, and local communities. Critical to integrating ESG is ensuring the ability to collect all the relevant ESG data and to enable transparent reporting mechanisms. Regular ESG reporting allows all stakeholders to assess progress and hold the company accountable. It's also important to have clear ESG goals that align with the company's values and long-term vision - ideally following the oft-cited SMART principles. What's more, to be effective your ESG goals should be aligned with your broader business strategy and embedded into the company's strategic planning. And beyond this, it's worth remembering that ESG is an ongoing journey requiring regular assessment of performance and frequent adjustments to achieve goals and improve outcomes.

This is all good business practice, but it's not always practical for all businesses. Small and medium sized enterprises, such as dock10, can find it challenging to adopt ESG practices for many reasons. Crucially, they have limited financial and people resources making it harder to allocate funds and personnel to ESG initiatives. Similarly, ESG standards and regulations can be complex and therefore costly for smaller businesses, and it may be difficult for them to get accurate, complete, and timely data on essential proof points such as diversity and carbon footprint, making it harder to be transparent. The time taken, and costs involved in ESG can actually reduce their competitive advantage. All this can minimise the motivation for SMEs to prioritise ESG: many have limited experience of ESG concepts and are unaware of the risks of not addressing them and with limited stakeholder pressure from investors, customers and regulators SME's can have little incentive to adopt ESG. Afterall, SMEs are understandably likely to be focussed on more immediate operational challenges making it hard to focus on the complex challenges posed by ESG.

In the world of the SME, the landscape is fundamentally different to that of the large corporates, so their approach to ESG needs to be different too. Here, small steps are the way forward: self-education on ESG; listening to staff that have a passion in a particular area; and looking critically at the considerable benefits that adopting an active diversity policy can bring to a business. Such small steps are the foundations on which on which a strong ESG framework can be built and that will help a business grow in a sustainable manner. At dock10, sustainability began as a regulatory exercise to support our customers, but it has evolved into a passion that sees us constantly striving for new ways to make improvements. Like other SMEs, we started with the basics of ESG and grew step by step, listening to our stakeholders and learning more day by day. Because while ESG is daunting for most SMEs, it's worth persevering with.

ESG is no longer a buzzword hidden in the back of a PLC's corporate report: it's a fundamental aspect of every modern business – large or small. Companies that properly embrace ESG principles, to any extent, not only contribute to a sustainable future but also position themselves for long-term success. Addressing environmental, social, and governance issues enables a business to manage its risks, attract capital, and gain a competitive edge while fulfilling their broader responsibilities to society and the planet. In these times of ESG consciousness, business success is increasingly aligned with creating a positive impact on the world – and SMEs are very much a part of this.