Commonly used ESG terms every SME should know

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During the Covid-19 pandemic, small and medium enterprises (SMEs), which make up at least 97 percent of the nation’s total businesses, languished due to the lockdowns and restrictions. They bounced back with a vengeance in 2022. The pandemic sparked off a chain of events that saw the necessity of digital transformation and the practicality of integrating elements of environmental, social and governance (ESG) strategies into their structure.

A study (Gao, M., Geng, X., “The role of ESG performance during times of Covid-19 pandemic”) showed that companies with good ESG performance have a stronger ability to respond to systemic crises in small-scale firms, state-owned firms and highly competitive market environments.

To demystify the confusion over what constitutes ESG, here’s a look at some common jargon related to ESG and to SMEs.

Breaking down ESG

• The company as a steward of the natural or physical environment.
• Use of natural resources and the effect of operations on the environment.
• Company’s environmental disclosure, impact and efforts to reduce carbon emissions. (Examples: Climate change, waste management, carbon footprint, renewable energy)
• The company’s relationships with people, human rights and equity.
• Policies and actions that impact individuals, groups, and society.
• People’s interactions with regard to ethics, justice and social well-being. (Examples: Employee welfare, gender equality, health-care initiatives, third-party relationships)
• Concerns with the company’s decision-making.
• Policymaking, distribution of rights and responsibilities.
• Involves board of directors, managers, shareholders and stakeholders. (Examples: Investor relationship, business ethics, transparency, conflicts of interest)

ESG benefits

1. Investors and government’s attention: Due to the attention, investors and governments can offer financial incentives to SMEs that embrace ESG.
2. Regulating risk elements: Companies with ESG in place can better monitor their company against obstacles and complications.
3. Confirms business credibility: ESG compliance helps bolster customer confidence and loyalty as it proves the company’s integrity.
4. Offers visibility and opportunities: ESG standards are backed by the 17 SDG goals and can help companies grow in line with ESG principles.

The Sustainable Development Goals (SDG)

In 2015, United Nations Member States shared a blueprint to ensure peace and prosperity for people and the planet. Called the Sustainable Development Goals (SDG) it lists 17 goals that aim to end poverty and other deprivations that work in tandem with strategies to improve health and education, reduce inequality and spur economic growth. These include addressing the problem of climate change and preserving the oceans and forests.

1. No poverty
2. Zero hunger
3. Good health and well-being
4. Quality education
5. Gender equality
6. Clean water and sanitation
7. Affordable and clean energy
8. Decent work and economic growth
9. Industry, innovation and infrastructure
10. Reduced inequalities
11. Sustainable cities and communities
12. Responsible consumption and production
13. Climate action
14. Life below water
15. Life on land
16. Peace, justice and strong institutions
17. Partnerships for the goals

United Nations Global Compact

In 2000, the United Nations Global Compact (UNGC) was formed to inform businesses and firms worldwide to adopt sustainable and socially responsible policies, as well as to report progress on these programs. The Malaysian and Brunei chapter, for instance, created an “SME Sustainability Action Guide” that suggested a Six-Step SME Framework, which SMEs can use to track the purpose when embarking on their ESG journey:

Learn: Understand how sustainability affects the business. Increase ESG knowledge via training sessions, reading, research and engaging with peer networks.

Assess: Identify the sustainable parts of the business. Evaluate how sustainable their business practices are in respect of the criteria laid out by ESG or SDGs.

Engage: Involve stakeholders internally and externally in discussion. Identify the business stakeholders and discuss their concerns with them.

Commit: Develop a purpose statement that drives their sustainability journey. Formulate the purpose of the business with regard to the international sustainability framework and publicize that mission.

Measure: Produce a report that shows what works and what needs improvement. Ensure the quantifiable nature of these implementations in order to record the outcomes as references.

Report: Communicate the purpose within and out of the organization. Share these measurables with stakeholders to show the company’s sustainable compliance and transparency.

What SMEs can ask themselves

SMEs can usually monitor their progress by segmenting their operations according to the three parts of ESG:

Environmental

• Is energy wasted in the business operation (lighting, appliances and machines)?
• Is there proper waste management conducted?
• What is the company’s carbon footprint?
• Are the suppliers sourcing from clean sources?
• Is the company using renewables in any way?

Social

• Is the company workplace environment conducive and safe for employees?
• Does the company practice inclusivity and diversity in terms of gender, creed, background, physicality, among others?
• Does the company give back to the community?
• Are stakeholder engagements a common practice?

Governance

• Does management lead in transparency through open communication with stakeholders on decisions, actions and direction?
• Are ethical practices upheld in all business transactions, with enforcement of a code of conduct?
• Is the board of directors diverse in its composition from a myriad of professional backgrounds?
• Does the company comply with and observe relevant laws, regulations or industry standards?
• Is risk management practiced to identify, mitigate and minimize potential disruptions and threats?

Although ESG is a large, many-branched tree that invariably takes time and effort to scale, starting off with what the company has done and learning how to align some of the operations to suit the ESG agenda could be a real starting point.

(This story first appeared on April 26, 2024, in The Star, the Malaysian publication that is part of the Asia ESG Positive Impact Consortium (formerly “Asia Sustainability Impact Consortium’’), which also includes the Philippine Daily Inquirer and Kompas Gramedia of Indonesia as founding members.)