Five reasons why mid-market businesses should care about ESG
As a mid-market business owner or business leader, it's easy to see why you should care about your environmental, social, and governance (ESG) performance. But do you? When you hear the words ‘sustainability' and 'corporate responsibility,' do you see it as a nice-to-have or a must-have business imperative?
No longer just an issue for the world's most recognisable brands; investors, regulators, and consumers are becoming increasingly concerned about the ESG performance of small and mid-sized companies. And hopefully, you will too.
In this article, we discuss why mid-size business owners need to build ESG into their overall strategy if they want to remain relevant and profitable.
But first, let's break down the components of ESG:
is a significant factor in ESG because it involves the planet Earth. No business can escape the energy and resources it uses or its impact on the environment and climate change. Key performance indicators include carbon/greenhouse gas (GHG) emissions, water consumption, energy use, and waste.
addresses how companies integrate social responsibility (SR) and good citizenship into their business models, management practices, and policies. With reputation being the most critical asset of every business, forming inclusive and diverse labour relations is key.
refers to the rules, practices, and processes that dictate how a board of directors governs and oversees a company, complies with the law, and meets the needs of its stakeholders. It ensures transparency, best practice frameworks, and a high level of accountability.
Together, all three components are designed to build a reputation that will benefit your company’s triple bottom line. You can learn more about each element here.
ESG makes good business sense
As global challenges like COVID-19, climate change, and economic inequality force leaders to rethink how business is done, it’s clear that traditional methods of profit-maximisation are no longer sufficient. Instead, businesses need new strategies that will drive equitable growth and long-term prosperity that do no harm.
"If we look at what's happening in the world today, the raging fires across western Canada and the 40-year drought in Chile," says Stephen Payne, a Partner in BDO Canada's Energy and Natural Resources practice, "we can see that these issues will continue throughout this decade and into the next unless we become more responsible about reducing our carbon footprint and the emissions that are causing our planet to change its climate."
Whether you're a publicly traded or private company, ESG initiatives will be critical to the supply chain for any company, and accountability will be a two-way street.
"If I'm interacting with other vendors and stakeholders who don't have the same level of responsibility, then ultimately, I become that way as well,” says Payne. “If, for example, I purchase raw materials to resell in Canada, and that organization advocates slave labour or other types of labour that we wouldn't tolerate in Canada, then ultimately, I'm responsible for that too, because I'm allowing that to happen."
ESG improves financial performance
ESG practices not only present companies with a powerful way to address the challenges of climate change and move towards a future defined by social justice and equity, but they also play a pivotal role in the long-term performance and value of a company.
They act as a check and balance for board members and executives seeking to make decisions that could potentially harm shareholders. They also provide a layer of risk mitigation in identifying a company that is a potential choice for future investment.
When it comes to the investment decision-making process, Armand Capisciolto, BDO in Canada's National Accounting Standards Partner, says, “ESG reporting is not about screening out bad actors. Instead, it’s about providing information for making informed investment decisions. It’s about looking at all aspects of a company’s performance and how it will fit into an investor’s portfolio.”
Millennials care about ESG
About a quarter of Australia’s population is made up of millennials. In a time where real-time news is just one click away, and everybody with an internet connection has the power to share what they want, millennials award brands with their spending power and attention. They show their appreciation or disapproval in just a few seconds.
Younger women and visible minorities are not staying silent when inappropriate comments are made. Women are demanding equal roles in leadership and companies that promote more women attract more female employees and clients. Customers and boards are looking for diversity initiatives in organisations. Websites, internally and externally, are being updated; more diversity is being involved in speaking opportunities; companies are implementing women leadership programs and measuring diversity data to report.
Millennials make up an increasingly significant workforce, and their buying habits will considerably impact the future. Companies that focus on sustainability and social responsibility will likely gain more attention because they align with millennials and firmly state their positions about the issues that matter to them the most.
Stand out against the competition
How you communicate your commitment to ESG will be just as important as your performance itself. Greenwashing, or using misleading or unsubstantiated claims to promote your company as environmentally friendly, is not going to cut it.
If you want to remain attractive to investors and gain recognition as a top employer, effectively communicating your ESG story in a way that builds trust with other stakeholders will be paramount. Stakeholders can include current or potential investors, consumers, suppliers, regulators, civil society groups, the media, governments, other organisations operating in your industry or sector, and employees.
Communicating consistently about ESG themes will also drive behaviour change within your organisation by influencing how people act, think, and feel. Finally, it enhances your business's competitive edge and reputation by communicating its ESG commitments to raise customer and stakeholder expectations.
"Again, whether it's environmental, social, or governance," says Capisciolto, "people want to know what you're doing as an organisation. People are asking for this information, and regulators are watching. Ultimately, it's only going to add to your competitive advantage."
ESG reporting framework
In 2020, five leading sustainability and integrated reporting organisations—the CDP, the Climate Disclosure Standards Board (CDSB), the Global Reporting Initiative (GRI), the International Integrated Reporting Council (IIRC), and the Sustainability Accounting Standards Board (SASB)—announced a shared vision for a comprehensive corporate reporting system, which includes financial accounting and sustainability disclosure.
This means that in the race to become sustainable, more and more companies will need to demonstrate that they are compliant with specific criteria, including those around diversity, inclusion, and carbon GHG emissions.
If the time is not now to build ESG into your overall strategy, then when?
If you are already building ESG into your strategy, then you are ahead of the curve and should be commended for it. But if not, we can help.
How BDO can help
BDO can help you better align your ESG efforts and reporting with industry standards to attract environmentally and socially responsible investors, mitigate reputational risk, and demonstrate commitment to transparent, value-driven decision making.
For more information, contact:
This article originally appears at: https://www.bdo.ca/en-ca/insights/advisory/risk-advisory/why-mid-market-businesses-should-care-about-esg