Six reasons why ESG should matter to SMEs

Six reasons why ESG should matter to SMEs

Some SMEs may believe that Environmental, Social and Governance (ESG) considerations do not apply in their businesses, particularly when compared to large and listed corporates. But this isn’t the case as implementing ESG, realistically, into an SME business comes with many benefits, including attracting funding opportunities.

The key is to prioritise ESG where it makes sense, and this should also be based on where a business is in its growth journey. Billions of rands are being allocated to ESG compliant entities, but while there is capital available, there is also a disconnect between what funders are looking for and how SMEs present their businesses for funding applications. Added to limited awareness on how beneficial integrating ESG can be for SMEs and there is real opportunity for growth and to bring even more funders and SMEs together.

Businesses that rate high on ESG elements are more likely to have access to funding opportunities, and this may include the benefit of a lower cost of capital. There are many reasons as to why incorporating ESG makes good business sense. Here are six considerations among them.

1) Financial Impact: For companies that embrace ESG practices, there can be cost efficiencies through reduced energy and water usage, additional income through waste sales to recycling plants as well as increased demand from savvy customers who are more inclined to engage with- and pay for products and services that are transparently sustainable.

2) Reputation: ESG can help to build a positive reputation. Companies that prioritise ESG practices and take steps to reduce their environmental impact, promote diversity and inclusion, and practice good governance are more likely to be viewed favorably by customers, employees, and investors.

3) Employee retention: ESG practices can also help to attract and retain employees. Younger generations are increasingly concerned about social and environmental issues, and companies that prioritise ESG are more likely to appeal to these employees.

4) Risk Management: ESG practices can help businesses to identify and manage risks. For example, companies that prioritise environmental sustainability may be better positioned to weather the effects of climate change or to comply with changing regulations related to carbon emissions.

5) Innovation: ESG practices can drive innovation and help businesses to stay competitive. For example, companies that invest in renewable energy or sustainable materials may be able to reduce their costs and gain a competitive advantage in the marketplace.

6) Investor Interest: Many investors are looking for companies that are committed to ESG practices, and companies that prioritise ESG may be more attractive to investors as a result.

By prioritising ESG practices, businesses can not only do good, but also do well. These factors will stand out to potential funders and Paragon Debt Advisory specialises in finding the right match. While SMEs may have work to do to become more ESG aligned, the right funder is out there.

SMEs may wonder where to begin with ESG

Improving corporate governance is an ideal starting point for SMEs to integrate ESG principles into their businesses. But it’s important to realise that global best practice for ESG is not necessarily applicable. There are ways to bring ESG into a young, smaller business that make sense to start, and then, as the business grows. For example, being in the position to hire an independent board of directors would be seen as a good measure of corporate governance, but this can also be costly for SMEs to manage, so it can be a goal to work towards.

For more information and strategies to improve ESG and funding opportunities, reach out to Paragon.