Environmental, Social, and Governance (ESG) frameworks evaluate a company’s sustainability impact. ESG reporting isn’t currently a legal requirement for non-listed small businesses, and in some parts of the world is under attack.
Yet pressure is mounting from investors, banks, and customers who want to know what your sustainability story is, and that you are a responsible business.
Small businesses who pay attention to ESG factors may be rewarded with:
enhanced brand reputation and customer loyalty, reducing reputational risks and accusations of ‘greenwashing’
a competitive advantage, in terms of lower cost of capital and cheaper financing
securing supply contracts with larger companies that are ever stricter on their supply chains to ensure they’re sustainable
compliance with new regulations, such as the Corporate Sustainability Reporting Directive (CSRD) which will affect listed SMEs in the EU from 2026
ESG goes beyond a narrow focus on climate change, net zero, and carbon reduction. A truly sustainable approach means small businesses must address broader social and governance factors that impact on all stakeholders.
Adrian Pryce DL, Chair of IOD National Sustainability Group
Adrian Pryce DL, Chair of IOD National Sustainability Group and Be. Partners Ltd and an Associate Professor at the University of Northampton, talks us through how small businesses can address ESG effectively, with a more integrated perspective that balances environmental, social and ethical considerations as well as economic sustainability.
Why the “E” for environment in ESG means smart business
The “E” in ESG relates to a business’s environmental sustainability. In general, the lower your business’s impact on the environment, the higher your ESG credentials.
Environmental stewardship includes not just carbon reduction but also managing environmental costs. It’s not just about sustainability – it’s about smart business. Areas that directly impact on your profit and loss (P&L) statement include:
- water conservation
- waste management
- energy efficiency
- travel policies
Optimising your resources can make it financially more attractive to run a net zero positive company than a net zero negative one.
“Optimising your resources can make it financially more attractive to run a net zero positive company than a net zero negative one.”
Small businesses should measure and report their progress on net positive goals to build trust and drive continuous improvement. High-quality, science-based data needs to be publicly shared and tracked, through schemes like the SME Climate Commitment as a prerequisite for a collective step change in business environmental impact.
Make the “S” for “social” central to your business strategy
Diligent sustainability reporting that measures ecological impact is just one side of the ESG story. The ESG framework considers all the ways in which a business can significantly impact the world around it – not just environmental impacts.
Former Unilever CEO Paul Polman advocates a net positive approach, asking businesses to go beyond minimising harm and instead actively contribute to the well-being of society and the environment. He argues that businesses need to reduce negative impacts on the environment and also strive to create regenerative business models that leave the world better off.
Alongside the growing and necessary challenge of measuring Scope 1, 2 and 3 emissions, the new frontier is in the creation of social value and impact measurement.
The traditional shareholder model prioritising short-term profits is increasingly being replaced by a stakeholder economy – a responsible business is one that considers the long-term interests of employees, customers, communities as well as the environment.
The UK Government’s emphasis on social value and impact measurement in procurement and corporate responsibility highlights this shift towards a demand for clear evidence of social value contributions.
The headline “Corporate sustainability must look beyond the environment” in Lloyds Bank’s full-page advertorial in the Financial Times in October 2021, just before COP26 in Glasgow, underscored this wider sustainability perspective. Businesses need to focus more on social issues as part of their journey towards sustainability if they want a slice of public sector procurement contracts worth over £50bn each year.
“Businesses that ignore this trend to integrate “S” for “social” risk being left behind.”
Additionally businesses that integrate ESG principles outperform those that do not, according to the 2021 McKinsey article on stakeholder capitalism. They create long-term value by prioritising all stakeholders – not just shareholders.
Businesses that ignore this trend to integrate “S” for “social” risk being left behind.
How to integrate “S” for “social” in your sustainability approach
Many companies have made bold net zero commitments but fail to address core workplace issues such as:
- fair pay
- job security
- employee voice and engagement
Ultimately, in terms of sustainability, businesses must focus on the material issues, or better said the concept of ‘double materiality’. This means identifying the ESG factors that are a) most relevant to their business operations and b) to their stakeholders.
A good starting point is the Good Business Charter which offers a straightforward yet comprehensive set of ten principles:
- Real living wage: commitment to fair pay.
- Fairer hours and contracts: ensuring job security and fair terms.
- Employee wellbeing: fostering a healthy workplace culture.
- Employee representation: valuing the employee voice.
- Diversity and inclusion: encouraging fairness and representation.
- Environmental responsibility: committing to sustainable practices.
- Pay fair tax: demonstrating ethical financial behaviour.
- Commitment to customers: ethical dealings and fair treatment.
- Ethical Sourcing: responsible supply chain management.
- Prompt Payment: ensuring good business practices across the supply chain.
You can put these principles to work with actions such as:
- team engagement surveys to regularly gather team feedback: surveys can help you stay on top of morale, monitor employees’ changing needs and reduce turnover
- a code of ethics to ensure a workplace culture that promotes ethical conduct and employee wellbeing
- training so that employees can carry out your ESG policies
- schemes that promote stronger ties to the community by supporting local sustainability, voluntary work and charities
Make “G” for “governance” everybody’s business
Governance relates to the quality of corporate leadership. Businesses that score highly on this metric have systems and policies in place to ensure they operate ethically on behalf of all stakeholders in a transparent, fair, and accountable manner.
In most cases, a fundamental shift is needed in corporate governance to make businesses more resilient and thus more sustainable in terms of their business operations as well as for society.
“Every board member should have … triple bottom line thinking – People, Planet, Profit – in their board meetings and strategic decision-making.”
Sustainability is often siloed to a single ‘sustainability champion’ on the board. Sustainability, however, should be the responsibility of all board directors. Every board member should have a working knowledge of, embrace and commit to triple bottom line thinking – People, Planet, Profit – in their board meetings and strategic decision-making.
The IoD’s Code of Conduct reinforces responsible business behaviour by outlining desirable governance principles. It aims to enhance ethical leadership and rebuild public trust in UK businesses. The code establishes six core principles to help directors navigate complex decisions and uphold high standards of behaviour in their organisations.
The six key components of the code are:
- Leading by example: Directors are expected to set exemplary standards in their personal conduct and leadership roles.
- Integrity: Emphasises honesty, adherence to ethical values, and consistent ethical decision-making.
- Transparency: Encourages open and clear communication, fostering trust within and beyond the organisation.
- Accountability: Promotes personal responsibility for actions, ensuring directors remain answerable for their decisions.
- Fairness: Calls for equitable treatment of all stakeholders, free from bias or discrimination.
- Responsible business: Encourages sustainable and socially responsible practices, aligning corporate strategies with societal and environmental impacts.
By embracing frameworks such as the Institute of Directors’ (IOD) Code of Conduct and the Good Business Charter, organisations can address ESG effectively while ensuring:
- that sustainability is embedded across all business functions – not just delegated to a sustainability champion or carbon measurement specialist
- directors and boards lead with integrity, integrating sustainability in its widest sense more effectively, thereby strengthening the overall governance landscape in the UK
Embrace the opportunity ESG offers for real change
More than ever, small businesses need to make employee wellbeing, diversity and inclusion, fair pay, and community engagement as central to their business strategy as carbon emissions. Long-term profitability must align with ethical practices and sustainable value creation, rather than short-term financial gains.
“there is a real opportunity to both strengthen your business and make a profound change to society, one we cannot afford to miss.”
To achieve this, we need bold leadership and partnerships with governments, NGOs, and communities to drive systemic change. For real change to happen:
- Boards must educate themselves on sustainability beyond just climate issues
- ESG considerations should be embedded in all business models, not just voluntary sustainability reports
- Directors must take a long-term view, considering the impact of their decisions on employees, communities, and the environment alongside financial performance.
The vocabulary may change and there will be naysayers wishing to undo the progress made in the ESG area, but underneath all the hype there is a real opportunity to both strengthen your business and make a profound change to society, one we cannot afford to miss.
Contact Adrian via email: sustainability@iod.com or adrian@bepartners.org
References:
McKinsey & Company (2021) The Case for Stakeholder Capitalism. Available at: www.mckinsey.com [Accessed 12 Feb. 2025].
Polman, P. (2021) ‘Stakeholder Capitalism’, Harvard Business Review. Available at: www.hbr.org [Accessed 12 Feb. 2025].
Polman, P. and Winston, A. (2021) Net Positive: How Courageous Companies Thrive by Giving More Than They Take. Boston: Harvard Business Review Press.
Henderson, R. (2020) Reimagining Capitalism in a World on Fire. New York: Public Affairs.
Relevant links:
- Heart of the City’s ‘Introductory guide to ESG’ (PDF)
- How to become a ‘net zero ready’ supplier
- Measure your emissions
- Free business carbon calculators
- Carbon emissions and the law
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