WHILE large corporates have begun making net-zero emissions pledges and are taking active steps to adopt environmental, social and governance (ESG) standards, small businesses are still trying to grasp its significance on their operations.
But with calls growing louder for businesses to build back better post-Covid, industry observers opine that SMEs will need to start integrating ESG into their business model to remain at the forefront in the longer term.
No doubt, most SMEs are still reeling from the damaging effects of the pandemic and digitalisation remains top on their list in their efforts to get back on their feet. However, ESG adoption need not be exclusive of this.
“There are a lot of solutions available where most people just look at them as just digitalisation. People don’t think that there is an ESG impact in these solutions. But there are,” says The Tech Connectors director Pradeeban Letsumanasingam.
He cites an example of a smart manufacturing solution, particularly, asset tagging sensors. These sensors enable companies to monitor the location and movement of their assets.
“You can put these sensors on forklifts and employees’ caps or helmets. This technology is essentially asset tracking. But they also provide services such as early accident detection.
“So in a factory, when a forklift driver is driving too fast, for example, the sensors and system will be able to identify if someone is walking nearby and alert the driver to slow down. Solutions like these have reduced employee accidents.
“So when we look at the impact area for solutions like these, it covers employee welfare and also health and safety, which aligns to the ‘S’ in ESG,” he shares at the recent Malaysian Banking and Finance Summit 2021.
As such, these solutions not only align with companies’ efforts to digitalise but also correspond with the ESG values.
Pradeeban urges SMEs to hasten their adoption of ESG as this could improve their access to finance as investors and financial institutions increasingly place more importance on such criteria.
Adhering to ESG standards would also improve their reputation and risk management, and help them with talent attraction and retention given the shift in millennials’ views and support for sustainability and ESG.
Notably, SMEs may find it a challenge to navigate through this new scope. As it is, negotiating their way around digitalisation and new technologies is already a complicated and resource-consuming process.
Even larger corporates, Pradeeban points out, are adopting ESG only because they have institutional investors who are ESG-aware and are pushing for it.
“I think a lot of the smaller SMEs just don’t know how to be sustainable. But one reason for this is that sustainability is quite complex and multi-faceted and acting on sustainable and relevant data is quite challenging,” he says.
Additionally, sustainability education may be costly and SMEs face a shortage of skills related to this area. In this regard, ESG is, understandably, not a priority for small businesses.
On the other hand, Elegant Hallmark Sdn Bhd managing director Eddie Hu notes that there is also a misconception about ESG among SMEs. Many of them equate ESG with corporate social responsibility.
This shows a lack of understanding of an ESG policy and hence, the lack of a structured approach in developing an ESG strategy.
In the ‘Family Business Survey 2021: The Malaysian Chapter’ report published by PwC earlier this year, it was found that only a handful of Malaysian family businesses made ESG a priority over the next two years, and only a third of Malaysian family businesses have a developed and communicated sustainability strategy.
“SMEs should adopt ESG. In the long run, this will help them improve their financial performance, allow them to have more effective cost management and enable value-creation in the mid and long term,” says Hu.
The change must, of course, come from the top. There needs to be a mindset shift in management and proactive steps taken to embed ESG practices throughout the business. They must also be measurable and communicated to the wider stakeholder group to get buy-in.
Given the constraint on their resources, SMEs will require some support in tackling ESG.
Hu says banks and financial institutions have a role to play in driving ESG adoption among smaller companies.
Banks themselves will need to have a very clear and dynamic ESG agenda and a dedicated division to manage ESG-related activities. They should also develop a general ESG guidance, framework and roadmap to drive adoption by SMEs.
He adds that banks can also help raise awareness on the significance of ESG by utilising their resources and network to provide ESG educational programmes or collaborate with government agencies and industrial stakeholders to drive awareness campaigns.
“They can also promote more sustainability-linked facilities by establishing sustainability and social-linked products and services and offer more competitive pricing and privileged services. They can also propose government grants for SMEs to subsidise ESG assessment and certification costs,” he says.
Pradeeban also highlights that banks have been working more closely with technology providers of late to help their SME customers digitalise.
This collaborative model can also be applied to helping SMEs adopt ESG.
“Certain technologies or platforms can help businesses digitalise their ESG or sustainability reading and indexes. So essentially for banks, I think it would be great if they can start working with tech-startups that have solutions that can improve ESG standards.
“Banks can also incentivise SMEs to participate in programmes that utilise these solutions to address ESG impact. Banks can start to educate their SME customers that ESG is not just something that is nice to have, but will also have longer term benefits,” he says.