In recent years, the need to go all in on environmental, social, and governance (ESG) has grown rapidly across businesses. And that’s particularly true for small and medium-sized enterprises (SMEs), which face pressure from various stakeholders, including customers, investors, employees, and regulators, to incorporate purpose-driven principles into their operations. The effort to meet these expectations can drive intricate strategic changes and reporting requirements.


ESG adoption is influenced by a range of factors such as regulations, policy, business risk profile, capital concerns, and the overall financial well-being of the business. These variables coupled with sourcing, costing, and pricing all relate to stakeholder interests, market demands, and the effect they have on the company, potentially influencing its reputation and culture. As a result, disclosure is becoming the norm. According to a 2022 McKinsey & Company report, 90% of S&P 500 companies and 70% of Russell 1000 companies disclose ESG reports in some form, a trend that’s expected to expand.  


Embracing ESG can give SMEs a competitive advantage. It can help them attract and retain talent, reduce turnover, and improve workforce productivity. And with a persistent demand for ESG-focused products and services, it also better positions SMEs for growth. But as businesses turn their attention to sustainability, any related reporting might become more complex and resource consuming. So, here are three ways SMEs can meet reporting expectations.


1. Pick the right partners.


SMEs often lean on a diverse network of suppliers and other partners. As a result, they must actively monitor the ESG of those third parties. Working with suppliers that adhere to high ESG standards contributes to a positive corporate narrative and fosters greater trust among stakeholders. Conversely, engaging with partners who aren’t ESG-compliant can introduce operational disruptions and legal ramifications, all of which can damage an SME’s reputation.


That’s why SMEs need to track how suppliers’ ESG credibility holds when it comes to materials, natural resources, sourcing from embargoed countries, relying on environmentally harmful business practices, or applying inadequate labor standards. The business landscape is increasingly shaped by sustainability concerns, so the importance of scrutinizing suppliers’ ESG practices goes beyond mere compliance. It’s a strategic imperative for SMEs to align with partners who share similar ESG commitments. By diligently assessing the ESG impact of their entire business ecosystem, SMEs can strengthen their commitment to ethical and responsible practices and fortify their resilience against potential external risks.


2. Report with rigor.


Here’s an ESG reporting wake-up call: 94% of investors believe corporate sustainability performance reporting contains unsupported claims, according to PwC’s Global Investor Survey 2023. Translation: SMEs must develop a reporting structure with strong transparency and accountability to ensure their ESG efforts resonate with stakeholders.  


They can start by following specific reporting standards or frameworks, such as the Global Reporting Initiative (GRI) or the Sustainability Accounting Standards Board (SASB). They also need to align with additional disclosure standards like the ones being proposed by the European Union’s Corporate Sustainability Reporting Directive (CSRD) and the International Sustainability Standards Board (ISSB). These frameworks can be instrumental in further developing reporting practices and disclosures so SMEs can reap the most potential benefits.


To navigate the complex landscape of sustainability reporting, SMEs must stay attuned to evolving global standards. SMEs should stay on top of the frameworks to identify ESG opportunities for their industry or business, and then seek the expertise of advisory and audit firms for guidance, implementation, and assurance. Note: ESG implementation doesn’t have to be accomplished in one fell swoop. It can be done in stages, starting with the basics first, such as reviewing suppliers or analyzing labor practices at global locations. 


These steps build a foundation of effective ESG and sustainability reporting that can yield a myriad of benefits. Investors and lenders are increasingly considering ESG in their investment portfolios and financing decisions. SMEs that integrate sustainability and ESG into their strategy and reporting can attract such capital at more favorable conditions. Additionally, such initiatives can lead to cost savings through reduced energy consumption, waste reduction, and improved efficiency.


3. Expand ESG boundaries.


Incorporating sustainability factors into SME strategies can drive innovation for developing products and services. By introducing offerings that are more eco-friendly and socially responsible, SMEs could explore new market territories. This extends to sourcing materials from new regions and countries or choosing service providers.


The commitment to sustainability and ESG practices fundamentally shapes an SME’s reputation and brand image. And the strategic adoption of sustainability not only aligns a company with evolving market preferences but also positions SMEs as responsible contributors to broader environmental and societal objectives.


Through products, services, and practices, SMEs can reflect the values and ethics of their founders and leadership. And the top-down commitment to sustainability and ESG principles profoundly influences the organization’s behavior. Establishing this ESG ethos provides a compass for SMEs as they adapt to evolving regulations, shape strategies, and build on financial reporting practices. This is why management buy-in must exist when SMEs embark on ESG-related initiatives.


ESG Done Right


For SMEs, the effect of ESG on strategy and reporting is influenced by a complex interplay of factors, including regulatory, financial, competitive, and societal considerations. SMEs that navigate these terrains effectively can boost stakeholder relations, financial performance, and long-term sustainability.


When it comes to reporting, management should consider the opportunities in the ESG space and their related compliance. What can the company do? Where can it do it? Which target areas can be improved first, then next? Implications of compliance with ESG will likely impact financial and disclosure reporting, operation, fundraising, transaction transformation, and ultimately reputation. Before selecting an ESG initiative, SMEs should apply such considerations judiciously, taking into account the existing industry and market regulations or requirements.


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