ESG as a Business Model for SMEs

Is the purpose of a corporation to make money, or do they have a larger role to play in advancing a more diverse range of social values?

Despite the emergence and increasing influence of ESG, there has been much less discussion about how ESG strategies and ESG reporting might affect small and medium-sized enterprises (SMEs). New paper by Mark FenwickTronel JoubertSanita Van Wyk and Erik P. M. Vermeulen offers a preliminary attempt to think about the impact and potential benefits of ESG on SMEs. Moreover, they consider the role of regulations in nudging firms towards more socially responsible strategies post-digital transformation and post-COVID. 

“… an ESG-oriented approach seems to offer at least two potential benefits for smaller and medium sized enterprises. First, engagement with ESG may offer firms the opportunity to connect with a more diverse pool of investors worldwide to explain and discuss growth strategies and invite input. These discussions can assist management in making better decisions and avoiding tunnel vision. A focus on ESG can develop firm capacities to identify new opportunities and gain a better sense of their peers and competitors and facilitate better decision-making. Second, proactive ESG engagement might help management identify expertise gaps in the board of directors and executive teams. In a collaborative context, investors and other stakeholders may be best placed to have a meaningful impact on the ESG strategy of SMEs creating positive feedback effects.  

… of course, the fear is that ESG engagement and reporting might come at a heavy price for smaller organizations if it diverts resources without delivering any benefits. But, as recently suggested by Richard Bernau, an ESG director at KPMG, the task of ESG reporting might not be as difficult for SMEs as initially feared. … Furthermore, as the popularity of ESG reporting grows, this requirement should not present an insurmountable burden to smaller firms, and like tax reporting it can become a routine feature of their operations. Bernau also recommends that ESG reporting be “proportionate to the size and financial return of the company.” Crucially, on this view, ESG might become a “central driver of enterprise value.” As Bernau noted, even among the “hardest of hard-nosed investors,” ESG is becoming increasingly important when looking at the future viability of a scaling business. 

Thus far, there has been little discussion about how ESG might impact SMEs and whether it might offer solutions to some of the challenges SMEs face in a post-digital transformation and post-COVID world. This seems unfortunate as the pressure to engage with such issues seems set to increase and impact all firms, irrespective of their size and the sector of the economy in which they operate.” 

Sources of Information.

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