The Rise of ESG for SMEs & Startups

In recent years, Environmental, Social, and Governance (ESG) factors have become increasingly important for companies across various industries. This trend is driven by a growing number of regulations as well as an awareness among investors, customers, and other stakeholders that the long-term success of a business is not just about financial performance but also about its impact on the environment, society, and governance practices. Companies that are proactive in addressing ESG issues are seen as more sustainable and better positioned to navigate risks and opportunities in an increasingly complex and uncertain world. As a result, ESG considerations are now a key part of many company strategies and decision-making processes.

The challenge for SMEs

However, while larger companies may have the resources and expertise to implement ESG practices and report on their performance, small and medium-sized enterprises (SMEs) face unique challenges in this area. SMEs often have limited resources to invest in sustainability initiatives, lack the same level of access to ESG data and expertise, and may not have the same level of stakeholder scrutiny as larger companies. As a result, SMEs may struggle to compete with larger firms when it comes to attracting investors, customers, and talent who are increasingly looking for companies that demonstrate a commitment to ESG issues. To address these challenges, SMEs may need to take a more targeted and strategic approach to ESG, focusing on areas that are most relevant to their business, and leveraging partnerships and collaborations to access resources and expertise.

Assessing and managing the ESG performance of companies can be done through both quantitative and qualitative methodologies.

• Quantitative assessment involves establishing a comprehensive ESG strategy that includes setting measurable goals, identifying key ESG risks and opportunities, and implementing initiatives to address these risks and opportunities. This process requires a significant investment in data collection, analysis, and reporting, as well as the necessary resources to implement sustainability initiatives and engage with stakeholders. Additionally, companies may need to develop new skills and expertise in areas such as carbon accounting, human rights, and stakeholder engagement, in order to effectively manage their ESG risks and opportunities.
• Qualitative assessment, on the other hand, focuses on the more subjective aspects of a company’s sustainability performance, such as its approach to sustainability strategy and stakeholder engagement. This can provide a more comprehensive and nuanced understanding of the company’s overall sustainability performance, but may require more subjective judgments and expert knowledge.

Qualitative assessments and scoring models are often more suitable for SMEs because they allow for a more nuanced understanding of a company’s sustainability performance, without requiring a large amount of data. SMEs may have limited resources and less available data to report on their ESG performance, making it difficult to use quantitative assessments and scoring models effectively. Additionally, qualitative assessments and scoring models can be tailored to the specific needs and characteristics of SMEs, allowing for a more customized and effective assessment of their ESG performance.

The role of software

The use of software can facilitate ESG assessments and management, particularly for SMEs, by streamlining data collection and analysis, identifying ESG risks and opportunities, and providing insights to inform sustainability strategies. But to generate these benefits, digital solutions should satisfy the following criteria:

• Accessibility: ESG assessment and management software suitable for SMEs should be user-friendly and require minimal technical expertise or training to operate.
• Affordable: The software should be cost-effective, with a pricing model that is accessible to SMEs, which may have limited budgets for ESG management.
• Customizable: The software should be customizable to the specific needs and priorities of the SME, allowing them to focus on the most material ESG issues for their business.
• Actionable: The software should provide actionable insights and recommendations that are tailored to the SME’s business objectives and ESG priorities.
• Scalable: It should be scalable, allowing the SME to grow and expand its ESG initiatives over time as resources and priorities change.

ImpactNexus ESG assessment

Together with the Borderstep Institute and SDG INVESTMENTS, our team at ImpactNexus developed a qualitative ESG assessment approach tailored to the specific needs of SMEs and startups. Our goal was to minimize the barriers to entry for SMEs with their limited resources and knowledge about sustainability. Accordingly, we developed a software solution that satisfies each of the five previously stated criteria.

• Accessibility: The solution is very easy to use, providing decision-makers in companies with concrete measure suggestions along the entire ESG spectrum from which they can select suitable measures. For each of the measures, detailed explanations are provided.

• Affordable: The basic version of the ESG assessment can be accessed free of charge to reduce barriers to entry for SMEs of all sizes. The solution can be accessed through the following link.

• Customizable: The ESG assessment asks companies for concrete ESG measures. In the first version, several hundred measures are provided. The number of measures will be gradually increased and specified for the specific needs of different industries, business models, and company sizes. Thus, the individual materiality aspect of each business is taken into account.

• Actionable: Companies receive explanations for each ESG measure, they obtain benchmarks and they receive suggestions on how to improve in a certain ESG dimension.

• Scalable: Building on the ESG assessments, companies can define concrete improvement targets to make the first steps on their sustainability journey. Stepwise, they can decide to dive deeper by for instance tracking important metrics and developing more sophisticated ESG measures.

The benefits of ESG management for SMEs

In today’s world, good ESG performance has become a necessity for SMEs. Adopting sustainable practices not only helps them to meet the growing expectations of stakeholders, including customers, investors, employees, and regulators, but also contributes to the long-term viability and success of their businesses. Good ESG performance can lead to several benefits, such as reducing operating costs, improving brand reputation and customer loyalty, increasing access to capital and investment opportunities, attracting and retaining talent, and mitigating risks related to environmental, social, and governance issues.

It is the goal of our ESG assessment to make these benefits more accessible to SMEs helping them to incorporate sustainability practices into their business operations and accelerating their transition towards more sustainable business models. Sharing many of our developed approaches for free, we invite everybody to test the approach, share their feedback and help us improve our solution. Knowing the complexity of sustainability and the dynamic developments on sustainability, we highly appreciate the wisdom of the crowd to make ESG ever more accessible to SMEs! Feel free to test the assessment yourself (register here) and dive deeper into the methodology (link to the ESG methodology page).

PS. Besides the ESG assessment we presented in this article, we are developing additional solutions for SMEs to help them define, quantify and report on their most material impacts. On May 25th, we will launch our climate impact module to help particularly innovative startups generate quantitative forecasts for the CO2 savings their solutions can generate. Feel free to register for the event through this link.