Adopting ESG practices: A winning strategy for SMEs
SMEs that integrate environmental, social and governance (ESG) factors into their business strategies position themselves favourably in terms of sustainable development and benefit in multiple ways.
These SMEs can receive funding or investments more easily, attract and retain workers, improve their brand image, and better manage risks. Another benefit: They meet new requirements from major prime contractors. According to this BDC study published in March 2023, integrating ESG factors is becoming increasingly necessary to land contracts with major prime contractors.
Where does ESG come from?
The term ESG was created in 2004 under the United Nations Environment Programme to define responsible investing in concrete terms. It was a question of taking into consideration how businesses perform in the environmental, social and governance categories, instead of strictly looking at financial statements.
Over the years, the ESG approach has gained in popularity despite the challenges it has faced. Nonetheless, there are still issues to overcome, including the absence of disclosure requirements, the lack of universal standards and reliable data, as well as the risk of greenwashing.
What is ESG?
But how can ESG be measured? What factors make it possible to analyse a business’s performance in this area? What are the most commonly used indicators? ESG is founded on an analysis of a series of criteria based on three major pillars: environmental, social, and economic.
Environmental criteria are measured using data on climate change, including greenhouse gas emissions, energy efficiency, water management, waste recycling, impact on biodiversity, deforestation, and pollution.
Social criteria are analysed using data on employee safety and health, work conditions, diversity, equity and inclusion, conflicts and humanitarian crises, client satisfaction, and employee and supplier engagement.
Governance criteria are assessed using data on how the business is led, administered, and audited, corruption prevention, the diversity of the board of directors, executive pay, cybersecurity and confidentiality practices, stakeholder relations, transparency in how executives are paid, and management structure.
The collection of data on established indicators and the communication of information to different stakeholders round out the approach. This is all part of a cycle that makes it possible to measure the results and make adjustments based on the targets being pursued.
How can ESG be integrated?
Integrating ESG into a business strategy is a gradual process adapted to the specific reality of the SME in question. There is no one-size-fits-all method but, in general, it is necessary to:
- Determine the ESG issues that are important for stakeholders that are internal (executives, employees, etc.) and external (clients, suppliers, competitors, etc.);
- Undergo training and become aware of the concepts of sustainable development and ESG (materiality, circularity, equity, diversity, inclusion, carbon neutrality scenario, etc.);
- Assess your ESG practices and maturity;
- Establish clear objectives and a realistic action plan that take into account the business’s region, sector of activity, size, and position in the supply chain.
Resources
SMEs do not always have the resources and expertise to integrate an ESG approach. For some, the challenges can appear insurmountable: competing priorities, limited access to funding, a lack of media visibility, insufficient knowledge of rules and standards, etc.
However, more and more measures exist to help them. For example, in May 2023, the financial community launched the Investi Fund, an investment fund devoted to ESG and sustainable finance. The BDC and Investissement Québec also offer funding and mentoring programs focused on the ESG transition. For their part, the International Sustainability Standards Board and the Canadian Sustainability Standards Board are deploying efforts to standardize and harmonize ESG standards. Certified professional accountants are preparing, on their side, to help their clients integrate ESG reports into their financial statements. Consulting firms (PwC, KPMG, EY, etc.) and digital solution suppliers (EcoVadis, Novisto, etc.) also offer services in this area. Before long, more and more resources will be offered to SMEs.
In fact, CED has committed to support the green transition among SMEs by encouraging the adoption of practices that take ESG criteria into account.
It is a matter of paving the way today towards a sustainable future.
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