What does a focus on ESG and sustainability mean for SMEs?

Steve McNulty knows a thing or two about ESG and sustainability. As well as being a Vistage Chair - both in the UK and the US - he describes himself as a “serial CEO of SME businesses”.

However, his real passion is for the Triple Bottom Line: a concept he was introduced to by former Vistage Chair John Blakey. “The Profit, People, Planet” concept has been around for a while”, he says. “It’s about trustworthiness: building a culture of wanting to create a profit, but also doing it with the right people for the right reasons, as well as doing good for the planet”.

Steve began to research more into ESG and sustainability. “I got myself trained as a B Leader”, he says, “giving me a certificate that says I can help companies in Europe to go through the B Corp certification process”. Since he started this process - nearly two years ago - he has seen increasing pressure for SMEs to demonstrate their sustainable credentials. The pressure is now on from customers, suppliers, investors, staff and all stakeholders for companies to engage with and be able to demonstrate their ESG credentials.

Where is the ESG pressure coming from?

The launch of B Corp certification in 2006, says Steve, brought ESG to the fore. He saw two areas in which SMEs were being forced to improve their sustainability.

“The first was from the big customers”, he says. “McKinsey, Moody’s, EY and others started to look at the ESG metrics of the companies that they were investing in or potentially looking to exit”.

The second, he says, was from the activists - young people, passionate about environmental and social issues (and sustainability) coming into the workforce. “You had a group of people who wanted to work for companies that had purpose, that were doing good for the environment, that looked after their people, that were fair and reasonable”.

He talks of how CEOs were being faced with tough questions in candidate interviews. Candidates would ask what their potential employer thought about the issues of climate change and sustainability and what they were doing for the environment.

“CEOs started to realise that they were struggling to recruit and retain the best people, as they wanted to work for businesses with purpose”, he recalls. “They knew that their customers were asking similar questions. What I wanted to show CEOs is that they could use the power of ESG to their advantage - making it part of their company culture and using it to push forward for even better results”. That performance and ESG were mutually beneficial and not mutually exclusive.

How is the Government’s Net Zero Strategy impacting on SMEs?

In mid-October 2021, the Government published its Net Zero Strategy. But how has this impacted SMEs?

“I’ve seen a shift in the way SMEs are asking for information”, says Steve. “As an example, I’ve spoken to many Vistage Chairs about running a workshop in the new year on ESG, sustainability, B Corp certification, and how to drive profits, attract great people and more by engaging with this”.

Normally, there would be a slow take up as many Chairs will have their speakers booked for part or most of the year. However, I am already at capacity for January and half of February. This shows how much demand there is for awareness and clarity there is. The key thing is awareness so that companies can decide whether to act on the benefits of ESG or allow the ESG requirements to act on them. How can SMEs begin to become more sustainable?

A Lloyds Banking Group survey from earlier this year suggests that four in ten SMEs are unsure how the Government’s Net Zero Strategy will affect them. However, Steve believes that Net Zero is a concern for nearly every SME. “I think the six in ten who say they know how it will affect them do have some idea”, he says. “But I think they will be caught in the usual trap of having far too much information available to them”.

With so much information about ESG and sustainability for businesses - including conflicting information sources - many have little idea where to start. They may be overwhelmed by what they see as a mammoth task. However, SMEs can lay out a more straightforward path forward by filtering that information, establishing the main areas of concern, and setting out the roadmap of potential routes to get there.

As a starting point, Steve recommends looking at the Good Business Charter. This accreditation recognises responsible business practices, with organisations required to meet all commitments for GBC accreditation. “It’s not a standard like a kitemark is”, says Steve, “but it shows that your company has jumped through some hoops to demonstrate that it does good things”.

For SMEs looking for something more comprehensive and complex, Steve suggests looking into the B Impact Assessment tool, which is free to use. Designed as a roadmap to B Corp certification, the BIA scores businesses on over 200 points, with a lower number needed to achieve B Corp certification.

“This isn’t a starting point”, says Steve. “It takes quite a time to complete the whole thing”. He will often go through a small section of the BIA with his clients, giving them a good indication of their progress.

“What I find is that the majority of my clients are on their way to the minimum points level but just don’t know where to look”, says Steve. “Very few businesses will be starting from zero - most of the SMEs I’ve spoken to have started at 50, 60 or 70 points and built on that foundation”.

At Vistage, Steve actively encourages Vistage Chairs and members to discuss and debate sustainability in their group settings. “Most people become Vistage members because they are growth-minded, they’re open-minded, they’ll accept a challenge, and they’ll be accountable”, he says. “So ESG, including sustainability, is something that conversations should be encouraged around in groups, sharing viewpoints and helping each other to move in the right direction”.

To do this, Steve uses an acronym - GEARED - to show the benefits of focusing on ESG and sustainability.

“If you want to grow, to enhance your brand, if you want to attract better customers, recruit and retain great people, energise your staff and deliver great results, an ESG focus can help. It’s not a panacea. But it will help you if you engage with it.”

How big a concern is greenwashing?

Steve believes that there is an “immense amount” of greenwashing - conveying that a business is focused on ESG and sustainability when this may not be the reality - in the larger market. However, he also highlights the fact that this may not be intentional. He highlights how moving from concept to delivery can take time, particularly in the corporate environment and within government agencies. However, he stresses how important it is that marketing and PR campaigns around environmental credentials do not highlight elements of ESG and sustainability that are not yet in place.

Many SMEs may struggle with establishing how far down the supply chain they should go when it comes to ensuring sustainable business practices. However, Steve stresses that it is essential here to decide whether your focus is things that will affect your value or things that will affect your reputation - or both.

“As an example”, he says, “I drink a brand of coffee that comes from El Salvador. It’s organic, ethical, and doesn’t cost any more than buying a jar from the supermarket. It has travelled a long way and so does not have the minimum carbon footprint. But it’s carbon footprint is a lot less than the supermarket variety.

There are two main areas of risk for companies of all sizes - financial and reputational. To avoid reputational damage, Steve suggests asking suppliers to validate just how they measure and improve their ESG responsibilities.. “Ask your suppliers to prove that they - and their suppliers - have ESG and Sustainability as a main plank of their culture and growth strategy”, he says. “Ask them to prove that they are not using slave labour, that they’re paying the going rate in the countries they use for production”.

The importance of communication

It is not just communication with suppliers that are important for SMEs looking to improve their ESG credentials. Communication within the organisation is just as important.

In Steve’s view, a commitment to ESG and sustainability should be treated the same way as your company’s vision, purpose and direction. In the 1950s, Peter Drucker - one of Steve’s leadership gurus, stated that a CEO should only do what they are good at. Other people should do everything else.

“As a CEO, your main role is vision and direction, including strategy. Everything else should be done by anybody - everybody - else”, he states. “We talk about SMEs having a purpose, a vision, a strategy, a direction. ESG and sustainability should be built into that, making it part of the company culture.”

For him, ESG and sustainability must be on every board agenda, every management agenda. “It doesn’t need to take any time at all”, he says. “What’s important is that it’s talked about. It could be sharing quick wins. It just needs to be discussed regularly to motivate people”.

Looking for peer support and advice to help you achieve your sustainability goals? Your local Vistage group can help.

To make that happen, he recommends making a senior member of the team the facilitator, or champion, of sustainability within the business. That facilitator then develops facilitators further down the path. This does not mean that the CEO/MD is delegating this. The CEO/MD needs to be the main driver of vision and direction = but they do not need to be the execution team.

“Many organisations will already have gone through something similar when appointing Mental Health First Aiders”, he says. “These were volunteers from the organisation who stated that they would like to be trained as mental health first aiders. It means that framework is already there: SMEs can adopt this approach to create ESG and sustainability ambassadors”.

He believes that many people will relish the opportunity to become ESG and sustainability ambassadors. The important thing, says Steve, is that it comes from the people within the business, not purely as an order from the CEO. Everyone has an important part to play.

Measuring sustainability

Of course, some form of measurement is needed to establish whether sustainability initiatives are working. But what does this measurement look like?

The event plus your reaction equals the outcome, so the famous saying goes. “The only variable in that equation is your reaction”, says Steve. “If you focus on outcomes, you will end up doing an awful lot of work for very little return”.

Instead, he recommends focusing on process. As a keen archer, he uses this as an analogy. “I can’t do anything about where the arrow goes once it’s left the bow”, he explains. “All I can do is make sure the process I use prior to letting the arrow go is perfect every time”.

He recalls his time in quality management. Before quality management systems were brought in, the finished product would be inspected at the end of the line, and the rejects taken and reworked. With quality management tools, quality was designed into the system, with no need to inspect at the end.

In the same way, he believes that if SMEs focus on doing the right things, the outcomes will look after themselves. The results, he says, are easy to measure.

“You’ll measure the reduction in your cost base. You’ll see a reduction in the churn of staff. You’ll start looking at your pipeline and profits. You’ll get more airtime in the local business magazines or on the local radio. You’ll look at all the things you normally measure as a business, without the need to remeasure or have new measures, as they’ll now be a fundamental part of your business.”

Be clear about the “why”

While Steve’s passion for ESG and sustainability is clear, he is quick to stress that this is a choice, rather than mandatory. However, he warns that ignoring ESG and sustainability and the Net Zero Strategy is a risk.

He highlights that implementing ESG measures is not just about enhancing your brand, driving profits and finding the right people. It is also about mitigating your future risk as a business.

Steve recounts a recent conversation with a business owner. “He told me that he wanted to build his business and then exit. I asked why? He replied that he wanted to live on a beach and enjoy himself. I asked him why he wanted to do that”.

In reality, he wanted to buy a beach property and a lakeside property, and make money to leave as a legacy to his family. Steve replied, “But wouldn’t it be nice if that lake house you want actually had a lake with water in it, and some trees that weren’t dead? Wouldn’t it be nice if that beach house was on a clean, sandy beach, and that the water was full of marine life?”

Steve’s point was that profit and sustainability do not have to be a “one or the other” choice. Every SME owner works hard to make their business a success. Many business owners are in business to leave a legacy to their family. “It’s not just about giving them money and property though”, says Steve. “Let’s give them an environment where they can enjoy it”.

Making your business more focused on ESG and more sustainable may seem like a daunting task. However, Steve is convinced that, for many, the perception is more scary than the reality. Only by looking at your existing processes and operations can you establish how sustainable you really are.

“You’re already doing better than you think you are”, is Steve’s parting remark. But without embedding ESG and sustainability into the heart of the business, many SME leaders are unaware of how successful they already are.

Many thanks to Steve for his time. If you’re interested in learning about how your peers are tackling sustainability, join your local Vistage group.