Developing ESG Beyond Urban Conurbations

Environmental, Social and Governance (ESG) frameworks have gained importance globally as a measure of corporate responsibility and sustainability. Nearly 100% of S&P 500 companies now publish ESG reports in some form, as do 93% of Russell 1000 companies.

As large corporations adopt ESG practices, their suppliers – often small and medium-sized enterprises (SMEs) – are expected to align with similar goals. Amazon, the global tech giant now  requires its suppliers to report their decarbonization plans with the company. “We know that to decrease our carbon footprint, we must work with our supply chain partners to help them decarbonize their own operations. Beginning in 2024, we’re updating our Supply Chain Standards to require suppliers to share their carbon emissions data with us and set carbon goals,” stated Kara Hurst, Vice President and Head of Worldwide Sustainability at Amazon.

Not just corporations, a number of countries are making ESG reporting mandatory. Countries such as New Zealand, the UK and the EU have already enacted ESG reporting. The UK’s legislation is perhaps the most elaborate, requiring not only companies, but also their associated supply chain companies to disclose their ESG reporting.

Some of the common barriers that SMEs face in adoption of ESG frameworks is lack of knowledge, limited budget and manpower challenges. This becomes particularly pronounced among rural SMEs that frequently find themselves overwhelmed by the burden of ESG compliance.

This raises the question: How can we encourage the widespread implementation of ESG in smaller rural firms while addressing these challenges?

The ESG Conundrum

Rural SMEs, often limited by smaller teams and lower revenue streams, struggle to allocate time, money, and expertise to ESG implementation. With few employees, many of whom are already stretched across core business functions, ESG compliance can feel like an added, unattainable burden.

Meanwhile, some SMEs may face the dilemma of not knowing where to start. Nevertheless, SMEs are key to achieving a sustainable and inclusive world.

The essence of ESG is to minimize a business’ negative impact on the environment, treat employees and customers fairly, and follow ethical and legal practices throughout the supply chain. While ESG principles can lead to reduced costs and minimized risks, change is inevitable for SMEs as ESG reporting standards and regulations, like the German Act on Due Diligence in Supply Chains and the EU Corporate Sustainability Due Diligence Directive, evolve. 

SMEs must now ensure they identify and mitigate risks related to human rights and environmental harm in their supply chains to meet client, partner, and regulatory expectations. However, imposing long ESG checklists and mandatory compliance on SMEs isn’t the most effective approach.

The Business Case

To encourage ESG adoption among SMEs, the right way is to frame ESG as a driver for innovation, impact, and growth, rather than as a compliance issue. At present, most SMEs view ESG programs as an unnecessary expense and don’t see the benefits. SMEs need to be shown the business case for adopting ESG: how it reduces risks and can help cement relationships with important clients. 

This is where larger companies with their greater access to technology, knowhow, and resources, can help. Indeed, some are already doing so. Eni, an Italian energy company has developed an open-to-all-digital platform, that allows companies to measure and report their sustainability data. More than 4,000 companies are members of this platform, with about 80% being SMEs. Meanwhile, IKEA requires its suppliers to adhere to sustainable sourcing and even helps them improve their ESG performance. 

ESG Strategy for SMEs

While the barriers to ESG adoption are significant, they are not insurmountable. A variety of strategies can help reduce the burden of compliance on rural SMEs and support the integration of sustainable practices into their operations.

SMEs should seek to partner with suppliers that already have strong ESG standards in place, enhancing the SMEs’ brand value among stakeholders. This approach reinforces their commitment to ethical and responsible practices, and also strengthens their resilience against potential external risks.

In terms of ESG reporting, SMEs can look to utilize free or low-cost tools available online. Many platforms offer basic templates and guidance for ESG reporting at little to no cost. Partnering with non-profit organizations or academic institutions can also provide valuable support and expertise in navigating ESG requirements.

This topic was discussed at the recently concluded Horasis Global Meeting in the city of Vitória, Brazil. The meeting brought together leaders from government, businesses, and civil organizations to help address global challenges such as inequality, peace, and climate change.

Photo Caption: A number of countries are making ESG reporting mandatory.