Why SMEs need to start taking action on ESG

Businesses around the world are setting sustainability and ESG (Environmental, Social and Governance) targets and looking at how their supply chains can help get them there.

These targets include: emissions reductions, minimum spend with diverse suppliers, positive social and community impact, recycled content and waste reduction – just to name a few.

Whether your business has set targets or supplies a major customer that has – you can’t afford not to take action. To meet your own targets, you will need to engage sustainable suppliers. Your major customers will be vetting you against internal ESG criteria; in some places this is becoming mandatory.

What is driving this?

Regulators have their sights set on ‘greenwashers’ and businesses need to put credible, data-backed plans in place to demonstrate how they will meet their forward-looking targets. Anything less risks a challenge based on misleading and deceptive conduct. Your large, major customers are also likely to be subject to disclosure requirements, requiring them to track and publicly report their progress.

How will these businesses reach net zero?

Until recently, many companies focused internally where change is more visible, and they have the greatest control to deliver change.

Now, companies are increasingly recognising the greatest opportunity lies in their value chain, in particular their supply chain. Suppliers, which often consist of SMEs, are therefore critical to reaching net zero and other ESG goals.

So, while SMEs may not have put ESG on the top of their agenda – now, to compete, the top-down ‘push’ will be felt from their customers to take action. If they don’t, they’ll fall short of minimum requirements and risk losing contracts to businesses able to demonstrate their ESG actions.

How can SMEs take action and meet requirements?

For many SMEs, the process to quote, tender and onboard as a supplier is already onerous.

Adding sustainability or ESG requirements makes it even more challenging. For customers, this is mirrored by the difficulty of continually validating and tracking supplier actions.

Case in point, there are now hundreds of third party administered programs and initiatives globally recognising and supporting supplier action on sustainability and ESG – what are known as ‘credentials’. These include:

  • Certifications, accreditations, and standards
  • Rating, scores and assessments
  • Memberships, initiatives and more.

While they vary at different levels, they’re effective at indicating the nature of a supplier’s action and the ESG focus area. Absence of credentials is a key flag.

While winning the contract is the obvious benefit for an SME supplier to meeting ESG requirements, it requires time and money to reach the required level, with no guarantees. Fortunately, there are now other incentives to drive SME action, including sustainability-linked benefits, such as discounts on finance or early payment (or both).

The arrival of sustainable finance

One area where incentives are coming to the fore is in the finance sector. On a global level, some companies have set up programs to financially reward suppliers for setting sustainability goals and science-based targets.

In an Australian-first, givvable, as sustainability partner, and Fifo Capital, as credit provider, have teamed up to provide suppliers with discounts off the cost of finance if they hold eligible sustainability credentials. Importantly, this type of program is accessible to any supplier, including small businesses, and can operate independently of any corporate supply chain finance program. This gives SME suppliers full control over their cashflow, positively flags to customers that the supplier holds eligible credentials and helps companies drive supplier action towards their targets.