- From investors to consumers, and employees to regulators, there is increasing pressure for businesses to integrate ESG considerations and metrics.
- SMEs are present in large corporations’ value chains and their non-financial performance will have an impact on the metrics of large corporations.
- We outline what can happen when SMEs approach sustainability as a vector of innovation, impact and growth rather than a simple compliance issue.
Businesses are faced with increasing pressure to integrate environmental, social and governance (ESG) reporting into their practices and business models. The pressure comes from multiple stakeholders. According to a recent poll, 88% of institutional investors put ESG on par with operational and financial considerations when making investment decisions; 60% of employees choose a place to work based on their beliefs and values, while 58% of consumers buy or advocate for brands based who match their beliefs.
While many of the world’s biggest corporations are now committed to shifting their practices to address this mounting pressure, we should not overlook what is happening beyond these headlines, namely, how the less-visible SME and mid-sized enterprise segment of the economy is approaching this. According to the International Labour Organization, they represent 90% of all firms globally, contribute to roughly 70% of employment, and drive up to 70% of global GDP.
In regulatory terms, “things are moving fast,” says João Vieira de Almeida, Chairman of VdA Legal Partners, one of Europe’s most innovative law firms and a long-time World Economic Forum’s New Champion. "In the EU, a broad legal package is now in place imposing specific obligations. The coming years will be extremely important."
Almeida adds that new regulations, such as the Corporate Sustainability Reporting Directive or the Corporate Sustainability Due Diligence Directive will enter into force gradually, and other sets of legislation will follow.
Looking beyond the surface
In the case of Europe, “the legislation adopts a whole value chain approach. It means that smaller companies are increasingly impacted because the large corporations, which often are their clients, will scrutinize the whole supply chain referring to these new metrics,” says Assunção Cristas, Head of ESG and Environment at VdA Legal Partners, before adding that “for the time being, as far as SMEs are concerned, it is still mostly about raising awareness, but we anticipate that the pace (towards ESG) will accelerate very quickly.”
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Eni, a major energy company, is a good example of how larger corporations are taking concrete steps to help SMEs build their ESG capabilities. “It is a ‘pain point’ for companies to comply with ESG performances requested from diverse stakeholders,” says Costantino Chessa, Head of Procurement Department at Eni, “this is why we partnered with BCG and Google Cloud to offer an open-to-all digital platform, Open-es.
It aims to improve the corporate sustainability profile of the smaller companies that are part of our supply chain, enabling them to measure sustainability performances by referring to the Forum’s Stakeholder Capitalism Metrics to make the reporting consistent, comparable and shareable”.
The initiative is already showing clear results. “One year after its launch, more than 4,000 companies, 80% of which are SMEs, coming from 76 different countries, operating in 62 industrial fields are using the platform” says Stefano Fasani, Open-es Program Manager. "The initiative also takes a social network approach, helping companies find new partnership opportunities along the supply chains to accelerate their sustainable development path.”
A necessary yet challenging transformation
While it is now clear that a passive approach or the status quo is not an option, we ought to recognize that the internal change and adaptation towards sustainability can be difficult. It is also important to acknowledge that the context for smaller businesses is already challenging. SMEs tend to be largely represented in business sectors that have been most affected by COVID-19 – they have smaller cash buffers, weaker supply chain capabilities and lower uptake of digital tools and technologies than their larger counterparts.
This also explain the findings of a recent Forum report highlighting that these smaller entities still often fall short in terms of their societal impact. While 69% of the more than 300 CEOs surveyed affirm having included sustainability in their mission statement; only 51% of them have integrated these considerations in their business strategy, and 21% of them link their executives’ compensations to their companies’ performance of social and environmental sustainability.
Sustainability as a new vector of value creation
We believe it’s useful to change the lens through which we look at this challenge. As highlighted by Tensie Welhan, Director of the NYU Stern Center for Sustainable Business, sustainability is de facto becoming the next wave of good management, in the sense that “it can drive innovation, operational efficiency, risk mitigation, and employee engagement”. It is therefore important to see sustainability as a management approach for long-term success rather than a compliance issue.
Here are some examples of mid-sized companies that have managed to approach and execute this successfully.
How pivoting to sustainability can drive profitability
After more than two decades of success with the pharmaceutical industry, Louis Roy, CEO and President of OPTEL, a Canadian traceability provider and Forum New Champion, identified a new opportunity for his company to significantly increase its impact and live up to its values by diversifying its offerings to help a wide range of industries reduce waste and become greener.
Moving beyond their core business, in which OPTEL had been very successful and profitable was not an easy endeavor for Roy. While OPTEL's financial backers and employees were not convinced about this vision, he pushed ahead. His company’s new intelligent supply chain solutions is now tracking more than six billion products each year, serving pharmaceutical companies, Coca-Cola, AB InBev, and top companies in the mining and agro-chemical industries, helping the company grow and expand through the sustainability vector. OPTEL Group has increased its revenue in the consumer packaging goods market by over 200% in the last three years, exemplifying a business model of environmental sustainability and growth.
How social inclusiveness can drive growth
But this does not stop here, ESG and the broader concept of sustainability include considerations not only for the planet but also people. A good example of this is Green Delta Insurance, another Forum New Champion, which is not only the first non-life insurer in Bangladesh to sell policies to individuals, but also the first to target women according to the International Finance Corporation.
Recognizing the changing role of women in the society and economy of Bangladesh, Green Delta Insurance launched Nibedita – an accident insurance product for both urban and rural women that now serves all income levels. “We wanted to introduce an insurance solution that can give women the confidence to move ahead while also taking care of their social and financial independence,” says Farzana Chowdhury, CEO of Green Delta Insurance.
According to the case study in 2020, Nibedita had more than 45,000 subscribers, a 15% year-on-year growth rate and 60% average renewal rate. Green Delta Insurance shows yet another example of how social sustainability and business growth can go together hand-in-hand.
Future-ready SMEs are on track
These examples and our recent research show how the most future-ready SMEs managed to leverage the opportunities that come with a clear and measurable focus on social and environmental sustainability. This new vector offers multiple value-creating routes for addressing SMEs’ highest-ranked challenges, such as growth and expansion, talent acquisition and retention, as well as funding and access to finance.
It also offers them an opportunity to gain reputational benefits as champions of sustainable strategies. This is not only key to the survival and success of individual companies, but also key for our collective capacity as a society to successfully shape the nature of growth, innovation and sustainability of our global, regional and local economies.
Recognizing the tremendous potential and impact of these companies, the Forum is further expanding its New Champions community, with the objective to accompany and support mid-sized companies in their transformation journey with access to expertise, network and public recognition of their efforts.