SMES are embracing ESG opportunities

13 May 2021

There is a shifting pendulum towards ESG in smaller companies. Tzoulianna Leventi, Investment Analyst, Aberdeen Standard Investments explains

ESG is fast-becoming one of the better known acronyms used in business today. Investors are increasingly focusing on how companies around the world embed and implement environmental, social and governance considerations in their operations. However, companies of all sizes recognise that managing businesses sustainably is no longer simply about reputational risk. This is leading to a structural force of change that has brought with it new risks – and even more opportunities.

Smaller companies in particular are embracing these opportunities. Historically, this has predominantly focused on the E and the G. But due in part to the devastating impact of Covid-19, the S – or social factor – has come to the fore. This covers a vast array of important matters, from human rights and labour issues, through to supply chain and sustainability KPIs, data security, customer privacy and community welfare.

While it’s more difficult to measure and quantify the S, more businesses are embracing social issues, for example improving diversity and inclusion around gender, ethnicity and expertise.

Smaller companies are increasingly aligning their corporate responsibility policies with the UN Sustainable Development Goals. This has led to improvements in business practices and culture. Implementing policies that not only consider social issues, but also go some way to addressing social inequality, can set a company apart from its peers in the eyes of investors.

For example, we recently engaged with Bytes Technology Group, an IT solutions and services provider. The company is trying to promote a more diverse culture and is increasing diversity hiring. It is also running employee development activities and providing a variety of certification opportunities. In tandem, management is promoting staff health and wellbeing. Its ‘Cycle to Work’ scheme promotes an active lifestyle, improves employee health and reduces community emissions. As a result of these initiatives, the staff turnover rate has improved. Companies are also looking for more innovative ways to listen to and engage with employees to better understand their needs and concerns.

Lockdowns have also demanded a seamless implementation of health & safety conditions. Management teams have had to find new methods for monitoring processes and review working environments. In some cases, they have also had to address potential or real Covid-19 outbreaks. In our experience, companies have demonstrated resilience and successfully supported staff. Several have quickly implemented Covid-19 protocols, such as track & trace, reporting and meticulous safety frameworks.

Local involvement

At a local level, smaller companies, by their very nature, tend to be more plugged into the communities in which they operate compared to multi-national Blue Chips. They are usually more cognisant of the impact – positive and negative – they can have and take their responsibilities seriously. As an example, long-standing Italian luxury brand Brunello Cucinelli seeks to achieve a ‘fair and sustainable profit while giving back.’ As a key employer in the region, the local community is at the heart of the company. It seeks to create opportunities for local young people irrespective of their qualifications. In 2013, it also set up a School of Arts and Crafts to help people learn and develop. The company pays them a monthly wage while they do so.

Beyond the immediate community, some smaller companies are finding innovative solutions to problems facing our planet. Notably, our ability to create a more sustainable future. In Holland, Corbion produces plant-based bioplastics used as an alternative to packaging for fruit and vegetables, single-use shopping bags and disposable drinking cups. Another example is the Norwegian business Borregaard, which operates the world’s largest biorefinery. Using lignin, a binding agent found in wood, the company supplies sustainable alternatives to oil-based chemicals. Its products have a wide range of applications, including dispersing agents in concrete, textile dyes, pesticides, batteries and ceramic products.

Small- and mid-sized companies are proving that not only does their size provide them with the agility to implement change quickly, but that they can foster the kind of culture that cultivates creativity and innovation. Embracing the S in ESG is allowing smaller companies to identify improvements for all areas of their business. This is resulting in more diverse and engaged workforces, as well as more profitable organisations. It also means these businesses are well placed for the sizeable challenges facing the world.

For investors too, this increased focus on ‘S’ will create opportunities as we move to a fairer, more sustainable world.

This article was first published in the May 2021 issue of Professional Paraplanner.

Professional Paraplanner