ESG isn’t just a matter for large, publicly traded companies. It’s increasingly becoming a must for small and medium-sized businesses. Companies that prioritize sustainability, good governance, and social responsibility are likely to be more attractive to their customers, supply chain partners, employees, investors, and prospective acquirers, benefit from government incentives, and become less risky—all of which can make them more profitable and thus more valuable in the event of a sale.
Conversely, companies that ignore or perform poorly in environmental, social, and governance criteria are more likely to be left behind. According to Grant Thornton, one of the largest accounting firms in U.S, “ESG credentials are no longer merely a ‘nice to have’: they are a must have for much of the mid-market.” The accounting firm found that “sustainability is now a major priority, with more than six in 10 businesses (62%) believing sustainability to be as important or more important than financial success.”
But that doesn’t mean ESG and financial success are mutually exclusive. In the past several years more and more stakeholders have taken a greater interest in ESG and rewarded companies that have a focus on sustainability, social responsibility, corporate honesty and transparency, employee well-being and workforce diversity. While many people see this as merely “doing the right thing,” there is also often an economic payoff. In other words, companies can “do well by doing good.” While increasing revenue and profits are almost always the corporate goal, ESG can expedite the process and make it sustainable.
How can ESG manifest itself in your small or medium-sized business?
- Employees: The pandemic highlighted the importance of both physical as well as mental health and a healthier work-life balance. Companies that prioritize their employees' safety and health are likely to have happier, more productive and more loyal workers. Moreover, companies with strong ESG policies are often better able to attract and retain quality employees, an important consideration in a robust job market. It can also help to motivate workers by instilling a sense of purpose, thus increasing productivity. By contrast, a weaker or nonexistent ESG ethos could drag down employee morale. This is particularly true among younger workers, who generally hold companies to higher standards.
- Community relations: Having an active ESG program can make your company a better corporate citizen in your local area, one that people in the community will want to do business with.
- Environment: Reducing energy consumption not only helps the environment but benefits the corporate bottom line. According to McKinsey, “ESG can reduce costs substantially. Among other advantages, executing ESG effectively can help combat rising operating expenses (such as raw-material costs and the true cost of water or carbon), which can affect operating profits by as much as 60%.” Moreover, “a strong ESG proposition can enhance investment returns by allocating capital to more promising and more sustainable opportunities.”
- Supply chain: Companies that have adopted their own ESG initiatives often require that their suppliers and vendors do the same—and be able to prove it and track what they’re doing. This is particularly true if your partners are publicly traded or foreign-owned.
- Customers: By the same token, more and more customers want to do business with ethical companies—even if it costs more to do so. McKinsey found that “upward of 70%” of consumers it surveyed “would pay an additional 5% for a green product if it met the same performance standards as a nongreen alternative,” while 44% of the companies it surveyed “identified business and growth opportunities as the impetus for starting their sustainability programs.”
- Required Regulation: To a greater degree, governments around the world are requiring companies to implement ESG standards. “While measurement and reporting standards continue to evolve, every major developed capital market around the globe is focused on implementing some form of mandatory ESG reporting,” Grant Thornton said. “Strength in ESG helps reduce companies’ risk of adverse government action,” adds McKinsey. “It can also engender government support.” If your company is dependent on government contracts, ESG should be a top priority.
- Investors: A greater number of prospective buyers, including private equity, as well as many lenders, are “asking significant clients to clarify their ESG risks and the strategies they intend to pursue to maintain resilience,” according to Grant Thornton. Companies that can demonstrate strong ESG programs are more likely to command greater valuations when it comes to a sale.
Adopting and implanting an ESG program is just one way small and medium-sized companies in the business services industry can enhance their performance and their market value once it comes time to sell. In subsequent blogs we’ll look at other ways companies can improve revenue, profitability, and valuation and stay ahead of the competition.
Anna Brumby White, a FOCUS Principal, has over 25 years of experience as an influential business leader working with Fortune 500 companies and small businesses on multiple continents. Contact Anna at [email protected].