Primarily due to a lack of resources, small and medium sized entities (SMMEs) have been slower than their larger corporate counterparts in adopting ESG (Environmental, Social and Governance) principles in South Africa.
But in light of the growing shift of capital and societal demands towards ESG factors, SMMEs need to at least make small steps towards greater sustainability. Failure to adapt means they could find themselves struggling to attract staff, maintain strong supplier relationships, raise finance and maintain a strong brand.
But there are challenges.
SMMEs, as well as those in the unlisted space, are often owned by a combination of founders, private equity firms, family offices and management. Smaller unlisted companies cannot necessarily afford large independent boards, independent remuneration committees and audit committees as suggested by ESG principles.
They often do not have to comply with all the typical regulatory requirements of a larger listed company or follow King IV corporate governance standards to the letter.
Additionally, when it comes to governance, non-executive directors are typically shareholder representatives who cannot be seen as truly independent.
Research on and the adaptation to sustainable products is often too costly for smaller companies. They are hindered by difficult to interpret data as well as a lack of resources.
But if capital continues pursuing larger, listed organisations, we will continue to see dwindling support for unlisted and smaller corporates. These companies will simply have to recognise ESG and embrace sustainable practices if they want to grow in the shifting economic landscape.
The good news is that they don’t have to replicate the larger company structures and ESG application methodologies. There are simple but profound steps they can take to begin the ESG journey.
How to make smaller companies more competitive
Many important areas of business are easily measurable: board composition, diversity, ethics policies, carbon intensity, energy efficiency, waste management, employee wellbeing and community engagement.
Smaller enterprises do not have to measure and report on all of these metrics but rather focus on the key factors that are material to their core operations.
If measured, all corporates can produce targets, benchmarks and track progress against these ESG metrics. These can be reported publicly on their website or social media. It may even help reduce staff turnover as increasing numbers of workers seek out the feel-good factor of being employed by a forward thinking, sustainable company.
Another step towards further transparency can be achieved in the form of values statements that communicate intent and the goals of the business.
This greater transparency is a big win for smaller companies and has the potential to dramatically improve branding and perception.
Most significantly, the consideration of ESG factors as part of an overall risk management exercise can be revealing. It can save costs and direct executive resources where they are needed in the business.
Demonstrating how you are contributing and enhancing the community that the business operates in is another way to create goodwill, attract capital and make an impact as a good corporate citizen.
ENDS
Pressing need for South African SMMEs to focus on ESG principles
