By Phil Kenmore, Director, Corporate Development & Partnerships, The Open University
Environmental, Social and Governance (ESG) measures are a key topic of strategic conversations among senior business leaders, particularly when it comes to meeting consumers’ and investors’ expectations, ethics and values. With small to medium-sized enterprises (SMEs) accounting for 99.9% of the private business sector, they have a vital role in implementing ESG for both its impact on economic success and for the wellbeing and environment of the local communities they serve. While ESG may be seen as the concern of large corporations, SMEs can make a huge difference collectively.
SMEs also form a vital part of the supply chains of larger organisations. Non-compliance with ESG makes it increasingly difficult for businesses to secure contracts with organisations looking to work with suppliers that are ESG-ready.
Defining ESG
According to the British Business Bank, ESG is a collective term for a business’s impact on the environment and society as well as how robust and transparent its governance is in terms of company leadership, executive pay, audits, internal controls and shareholder rights. It measures how a business integrates environmental, social and governance practices into operations, as well as the business model, its impact and its sustainability.
The Open University’s report ‘Educate, Measure, Speak up: How businesses can get ahead with ESG’ found that almost three in four (72%) small businesses agree that ESG factors impact their business’ brand or reputation. But less than one in 20 (4%) of small businesses have a fully realised ESG strategy, highlighting the disconnect between awareness and action. But what is ESG when we dig deeper? And how can smaller businesses take action?
The core pillars of ESG
SMEs need to educate themselves and their employees on the core pillars of ESG and develop skills and raise awareness within the leadership team, which then will trickle down to the wider workforce and other stakeholders.
Environmental
SME leaders can start to take each of the ESG components and ask questions internally. Environmentally, considerations around the supply chain and ethical practice should be asked, including what measures have been taken to reduce an organisation’s carbon footprint and embracing circular economy principles including eliminating waste and pollution, keeping products and materials in use and regenerating systems.
The British Business Bank estimates that smaller business contribute around half of all UK business-driven emissions, so it is imperative that Net Zero is seen as a target for every business and not just larger firms.
Free learning such at that offered by The Open University’s OpenLearn platform can give staff at all levels a grounding in sustainability.
Social
The social pillar of ESG, addresses the people behind an organisation and society as a whole, helping business leaders level the playing field and make their organisation a better place to work – whether that be through training or wellbeing initiatives, to create an attractive place to work for potential employees. The social aspect also reflects on wider society – leaders should ask themselves, what can be done by my business to support my local community?
SMEs are often central hubs for many local communities, acting as meeting places, employers and suppliers. At The Open University we have worked in partnership with many employers to provide opportunities locally for people to learn and improve their employability.
The OU recently partnered with Glastonbury Town Deal to provide free learning for local people, with the opportunity to go on to further study. Could SMEs offer their own opportunities to disadvantaged groups looking to contribute to society?
Governance
The governance component reflects on the ethical behaviour and transparency of a business at the leadership level, especially when it comes to key decisions being made and operational and financial performance.
Some examples of good governance could include:
- Ensuring that the board of directors is diverse
- Aligning the business model to the needs of the planet
- Being transparent and having clear policies
- Steering clear of bribery or corruption
- Aligning salaries to ESG initiatives
- Planning for a sustainable future
How to incorporate ESG into your business
The Open University’s recent report explored the attitudes of business leaders in adopting ESG strategy, finding that almost three-quarters (72%) of SMEs have a higher interest in incorporating ESG, and the report set out three recommendations to deliver success – through education, measurement and ‘speaking up’.
Educate
Every SME is unique – and when looking into ESG, it’s worth identifying the key issues that are most relevant to the business and its size. Helping employees and those at the leadership level become more aware of ESG issues allows SMEs to explore viable solutions and approaches.
Investing in an ESG external expert can help get SMEs started on their journey, but keeping this consultant isn’t always sustainable due to financial constraints. Investing in upskilling other employees on ESG initiatives (even if not part of their core role) will help drive this forward and ensure that when the consultant leaves, new ways of working can continue.
The Open University’s report into ESG revealed that a lack of skills is the second biggest blocker for businesses when looking to implement an ESG strategy, but working with a training provider to upskill multiple employees is a great opportunity to bridge the gap in the short term and support efforts to get the full organisation involved. Adding ESG responsibilities to an employee’s job description can be both a growth and development opportunity to invest in not only the individual but the business as a whole.
The report highlighted that nearly a third (30%) of SMEs aren’t offering training, so it’s vital that employers become more aware of their options and invest in appropriate training programmes through partnering with an organisation such as The Open University to keep on track with ESG objectives.
With smaller budgets to consider, there are plenty of free online courses such as OpenLearn and even micro-credentials and short courses which avoid taking employees out of the business for too long. To help companies in the sector, Manufacturing Northern Ireland, which launched a free online learning platform with The Open University, providing a platform to foster the growth and skills of employees through inclusive and flexible learning, and helping to create a culture of continuous learning.
Measure
ESG measurement and reporting requirements can be complex to navigate for SMEs, with multiple frameworks that businesses can choose to adopt. But starting to collect data helps highlight issues and solve problems that may not always be in plain sight.
Our report found that the top barriers to engaging with ESG are a lack of necessary financial resources and skills, along with a sense that adopting ESG is simply too complex to work for their organisation. But SMEs can start small by looking at simple measurements such as analysing travel expenses of the workforce, or how is waste disposed, to start the process of measuring the impact of an organisation on the environment and integrating it into business strategy and even bonus targets and rewards.
Speaking up
Positioning a smaller business as an advocate for social and environmental change in society is another way to help them define a purpose and bolster their reputation. Find causes that are close to the workforce and find out what employees are doing to spark changes locally and nationally. Community outreach, such as local charity partnerships or implementing staff volunteering, is an indicator of showing your interest in making positive differences to the environment and local community. Perhaps there is a local cause or campaigning issue that the business can adopt which will bring the business closer to its community.
Clear values and ethics can also be attractive to employees. A recent OU survey found that seven in ten employers are noticing a change in the priorities and values of young people. Aligning the business with what’s important to Generation-Z can help to futureproof the workforce and attract the leaders of the future.
ESG – everyone’s business
ESG has an impact on every role within an organisation and covers a wide range of processes and decisions so it may be difficult to know where to start implementing a change. However, SMEs have the benefit being less complex than larger organisations, so positive change can happen quickly through small steps.
With SMEs accounting for around 13% of the world’s carbon emissions and with six million small and medium-sized businesses in the UK alone, everyone has a part to play. There is clear potential for SMEs to not only create value for their business, but also address wider societal and environmental issues, and differentiate themselves to customers, investors and future employees in the competitive environment. Providing transparent initiatives that develop a culture of sustainability, social impact and good governance will be critical in facing future challenges.
