Demystifying ESG: small businesses making a big impact

Dive into the world of ESG and learn how small enterprises are championing sustainable and ethical practices, and why ESG can be a game-changer for your business.

Demystifying ESG: small businesses making a big impact

In the business world, three letters are becoming increasingly influential: ESG (Environmental, Social, and Governance). Long considered the purview of large corporations, ESG principles are now being adopted by some small businesses with tremendous success. But what does ESG truly mean for small businesses, and how can they leverage it to not only make a positive societal impact but also boost their bottom line?

ESG: beyond the buzzword

At its core, ESG is about businesses making decisions that benefit not only their shareholders but also society and the environment. It's an ethos that recognizes businesses—both large and small—as critical players in shaping a sustainable future.

However, the adoption of ESG isn't merely a nod to philanthropy or following a trend—it’s a powerful business strategy. Embracing ESG principles can not only propel a company into a position of societal leadership but also open doors to unique business opportunities. In a saturated market, ESG can be the distinguishing factor, offering an edge over competitors. By identifying and capitalizing on ESG-driven opportunities, small businesses can carve out niches, cater to a more conscious consumer base, and even command premium pricing due to their sustainable and ethical practices.

Environmental stewardship

The 'E' in ESG delves deep into the realm of environmental protection and sustainability. For small businesses, this isn't merely about adopting a surface-level green image. It demands a holistic integration of eco-friendly practices at the heart of daily operations.

The key is to ensure that every business decision—right from sourcing raw materials to waste management—reflects a commitment to reducing environmental impact. This could mean opting for local suppliers to cut down on transportation emissions, integrating renewable energy sources, or implementing waste reduction programs that focus on recycling and reusing. It's about understanding one's entire business ecosystem and finding opportunities at every turn to create a sustainable footprint.

Spotlight on success: Consider the journey of Who Gives A Crap, a startup selling toilet paper. They took the 'E' to heart by using bamboo and recycled paper, avoiding the traditional tree pulp. Not stopping there, they also committed to using eco-friendly packaging and donating half their profits to build toilets in underserved regions. This commitment to environmental sustainability, combined with a clear value proposition, has garnered them a loyal customer base and commendable growth.

A cautionary tale: Volkswagen's emissions scandal in 2015 stands out as a stark warning of what can go wrong when environmental considerations are bypassed. The automobile giant manipulated car diesel engines to cheat on emissions tests. When the deception was uncovered, it tarnished the company's reputation and led to a severe financial blow. Volkswagen's market value dropped by a third, which was around $33 billion, in the days immediately after the news broke. Moreover, they faced penalties and settlements costing tens of billions of dollars.

Social responsibility

At the heart of the 'S' in ESG lies a commitment to ethical people management. This doesn't just pertain to customers and suppliers; it's about encompassing every individual connected with the business - be it employees, partners, or the broader community. It's about creating a workplace that champions diversity, fosters growth, and thrives on mutual respect. Building such a business model revolves around prioritizing relationships, upholding human rights, ensuring fair labor practices, and strengthening community ties.

Spotlight on success: On the employee front, take the example of Patagonia. This outdoor clothing company has consistently been lauded for its commitment to employees. From offering on-site childcare to ensuring fair trade practices and supporting employees in environmental activism, Patagonia has embedded the 'S' deeply into its operations. As a result, they've not only attracted a dedicated workforce but have also set themselves apart in a competitive market, drawing customers who align with their values.

A cautionary tale: The importance of the 'S' becomes even more evident when considering Uber's 2017 controversies. That year, the company grappled with a range of issues, from workplace harassment allegations to leadership disputes. The negative publicity, combined with strategic financial moves, led to a significant dip in its valuation. By the end of 2017, a consortium led by SoftBank, Dragoneer, and Sequoia Capital bought shares at a reported 30% discount from Uber's previous high valuation, taking it from nearly $70 billion to around $48 billion. While the exact causes behind the valuation drop are multifaceted, including the specific deal structure, the episode underscores how disregarding the 'S' can materially impact a company's financial standing and growth prospects.

Governance: ethical business

The 'G' in ESG zooms in on the governance structure and practices within businesses. This embodies the essence of ensuring ethical leadership, transparent operations, stakeholder inclusivity, and a broader perspective that emphasizes long-term sustainability over short-term financial gains. Governance is not merely about establishing policies but ensuring they're implemented, respected, and that they truly influence day-to-day decision-making.

Spotlight on Success: LEGO Group, a globally recognized toy manufacturing company, has shown a stellar commitment to governance. Their responsible business policies provide an in-depth look into how they manage relations with stakeholders, handle anti-corruption measures, and ensure that their suppliers adhere to responsible practices. By setting a concrete, actionable roadmap, LEGO ensures that its governance isn't just on paper. Their consistent efforts have culminated in them being ranked the most reputable company in the world by the The Global RepTrak® 100 report in 2023.

A cautionary tale: The Wells Fargo scandal of 2016 stands as a stark reminder of the consequences of neglecting good governance. Employees of the bank created millions of unauthorized savings and checking accounts on behalf of clients without their consent. This strategy aimed at artificially boosting sales figures led to unjustified fees and damaged credit scores for countless customers. The repercussions were severe: Wells Fargo was slapped with fines totaling $185 million, witnessed a substantial slump in its stock price, and, perhaps most damaging, eroded the trust of its longstanding customer base and stakeholders.

Why ESG matters more than ever for small businesses

Adopting ESG isn't just about altruism—it's about survival and success. A study by Kearney Research across various sectors indicates that ESG not only boosts company valuation but can also spur new business avenues, enhance profit margins, and cut costs. Additionally, a robust ESG stance can lure talent and amplify employee productivity.

Furthermore, many major corporations are now integrating ESG benchmarks into their supply chain requirements. This means that small businesses that align themselves with ESG principles and exhibit sustainable and ethical practices stand a distinct competitive advantage. By meeting these criteria, they position themselves favorably to secure lucrative contracts with larger entities. In essence, adherence to ESG can open doors to partnerships and deals that were previously out of reach for many small businesses.

Spotlight on Success: A classic example is Echogen Power Systems, a small enterprise in Ohio. By developing an environmentally friendly heat-to-power engine, they attracted significant investment and partnerships with larger corporations looking to bolster their green credentials.

Roadmap to ESG for small businesses

Here are five actionable steps to craft a robust ESG strategy for your business:

  1. Begin with tangible steps: Instead of attempting sweeping changes from day one, focus on tangible, incremental steps. This could involve introducing recycling stations within your workspace, transitioning to energy-efficient office equipment, or establishing a monthly "green" challenge that encourages eco-friendly behaviors among your team.
  2. Stakeholder engagement: Transparency is key. Hold regular forums or surveys with your employees, suppliers, and customers, discussing your ESG initiatives and seeking feedback. This not only provides invaluable insights but also fosters a culture of inclusivity. By directly involving stakeholders, you root your strategies in real-world perspectives, avoiding superficial gestures and ensuring measures resonate with the community.
  3. Document and share your progress: ESG isn't a one-off project; it's an ongoing commitment. As such, monitoring and reporting are crucial. Develop a transparent tracking system and share updates—maybe through a dedicated section on your website, periodic newsletters, or even social media. This continuous communication not only showcases your commitment but also holds your business accountable.
  4. Align ESG with core business values: ESG should be intrinsic to your company, not just an appendage. Tie your ESG strategies to your business values and objectives. For example, if you run an organic food business, focus on sourcing sustainably, reducing food waste, and ensuring fair wages for farmers.
  5. Guard against ESG 'window dressing': Aiming for genuine change means going beyond surface-level certifications or participating in causes just for publicity. To avoid this, regularly review your ESG goals. Question their depth, their impact, and whether they align with your overarching mission. Authenticity is paramount, and businesses that truly embed ESG within their operations reap more substantial benefits in the long run.

Spotlight on Success: Pela Case stands as a testament to the effectiveness of genuine ESG commitment. This innovative company produces compostable phone cases and is deeply invested in its mission. They don’t just market their products—they regularly engage their audience by sharing real-time updates on their positive environmental impact. Whether it's detailing the number of plastic bags kept out of oceans, the amount of waste reduced, or even new initiatives they're exploring, Pela ensures their community is an active part of their ESG journey.

Key takeaways

Small businesses may not have the vast resources of their larger counterparts, but their agility and community connections position them perfectly to be ESG frontrunners. In the landscape of modern business, where consumers increasingly make choices based on values, small businesses embracing ESG aren't just doing good—they're paving the way for a prosperous future.