Two decades ago, no one had heard the term ESG. How things have changed. The term was coined by the United Nations Environment Programme Initiative in 2005 to encapsulate the three aspects of sustainability: environmental, social and governance issues.
However, there is still a lack of understanding of the relevance of ESG reporting to small- and medium-sized operations.
We at Socialsuite speak daily to businesses in Australia, New Zealand, and the United States about ESG reporting. These conversations highlighted some key misconceptions around ESG, many of which play a role in preventing enterprises from beginning their sustainability journey, or understanding why it is important.
Here are my top five ESG misconceptions in the SME market:
Misconception 1: “ESG is only for sustainable businesses”
There is a view that ESG is only for sustainable business, those operating in renewables, recyclables or organic produce for example.
It’s understandable that businesses may not want to draw attention to a less-than-perfect scorecard, especially those in industries not typically known for their green credentials. But ESG reporting is a journey, and all businesses have areas they can improve, no matter what the sector. Employees now expect this commitment, as do customers, suppliers and potential investors.
Misconception 2: “ESG perfection is required to start reporting”
Many small businesses are already doing things that would rate them well on an ESG screen, but by not recording and reporting on them they are missing out on the benefits.
We are constantly telling clients that something is better than nothing – and then once they begin their reporting, they wonder why they didn’t start sooner. There is something motivating about seeing gradual improvements from year to year, no matter what the starting point. Stakeholders do not look for perfection, rather a long-term commitment to doing good business.
Misconception 3: “My investors don’t care about ESG” or “I don’t have any investors so it doesn’t matter”
Another commonly held misconception is that a small- or mid-cap company’s investors don’t place any value on ESG. Or that founder-owned businesses have no investors to impress – something they might live to regret when they hope to sell all or part of the business down the track.
Over two-thirds of investors already screen for ESG. ESG metrics are being increasingly valued by investors alongside a company’s financials. If you’re not reporting on it, you may already have been ruled out by potential investors or customers – without you even knowing it.
Misconception 4: “ESG does not align with our core priorities”
While you may not think of ESG as a priority, a strong ESG proposition can safeguard a company’s long-term success. Simply, it equates to ‘doing good business’.
Research by McKinsey found that ESG links to cashflow in five important ways: facilitating top-line growth, reducing costs, minimising regulatory and legal interventions, increasing employee productivity, and optimising investment and capital expenditures.
Misconception 5: “ESG is expensive, difficult, and time consuming”
ESG can be complex and many smaller businesses do not have the budget to hire a consultant. But solutions are available, and they don’t have to be expensive. For example, Socialsuite has an adaptable subscription platform that helps companies report on their progress against the World Economic Forum’s Stakeholder Capitalism Metrics, a universal standard for ESG reporting. This platform serves as a solid starting point for many companies not able to afford an in-house ESG team.
There is also a wealth of information available online that provide the business case for ESG reporting, and advice on how to start.
It is easy to dismiss something as too expensive, but ultimately a failure to report on ESG issues could end up costing much more. No business can afford to get left behind.
