Small businesses are key to a more sustainable and inclusive world. Here's why

Small and medium-sized enterprises (SMEs) are a force to be reckoned with. They makeup 90% of businesses globally, create two out of every three jobs worldwide, support the livelihoods of over two billion people, and are indispensable to the smooth functioning of global supply chains.

Despite their enormous impact, many are not yet fully engaged on environmental, social, and governance (ESG) issues. It is easy to understand why. The EU, for example, classifies small businesses as those with 11-49 people and revenues below €10 million a year. A medium-sized business has 50-249 people and annual revenues of up to €50 million.

Owners and managers in such firms have a lot on their plate, and fewer resources than their larger rivals. They may feel they lack the time, knowledge, capacity or funds to tackle problems like the climate crisis or discrimination against minorities. Others simply do not know where to start. But we do need SMEs to work for a better world – for their own sake and for everyone.

Why measuring up on ESG matters for SMEs

Despite the jargon, ESG is about doing all you can to stop or minimize any harmful effects of your business on the environment. It’s about treating your staff and your customers fairly, without discrimination. And it’s about obeying laws and doing the right thing for the places and the people where you operate throughout your supply chain.

These are guiding principles that any business should strive to work by. And they can deliver a raft of benefits, from reducing costs to managing the risk that things will go wrong, meaning the company will be forced to close.

Change is coming for SMEs whether they like it or not. ESG reporting standards and regulations are evolving fast. For example, the German Act on Due Diligence in Supply Chains, effective since January 2023, and a parallel EU initiative, the Corporate Sustainability Due Diligence Directive, are part of a growing global drive to oblige companies to carry out human rights and environmental due diligence across their supply chains. If required, companies must show they have identified actual or potential risks to people and the environment. The evidence must be obtained from suppliers or the suppliers’ own suppliers.

As a result, SMEs that fall behind on ESG risk losing valuable opportunities with big companies, particularly where regulation or capital depends on it, unless they can match the ESG standards of their customers.

To remain on the right side of clients, business partners, and regulators, SMEs must show they are meeting society’s social and governance expectations – and reducing their greenhouse gas (GHG) emissions.

But presenting smaller companies with a long ESG checklist and making compliance mandatory is not the best approach.

Making the business case for ESG

The right way is to frame ESG as a driver for innovation, impact, and growth, rather than as a compliance issue. At present, most SMEs view ESG programs as an unnecessary expense and don’t see the benefits. In UN Global Compact surveys, fewer than half of companies with a turnover under $25 million report on their sustainability performance. Among big groups with revenues above $1 billion, 94% do.

SMEs need to be shown the business case for adopting ESG: how it reduces risks and can help cement relationships with important clients. This is where larger companies with their greater access to technology, knowhow, and resources, can help. Indeed, some are already doing so.

The Italian energy group Eni, for example, has made an open-to-all digital platform, Open-es, available so companies can learn to measure and report their sustainability data in a way that is comparable and shareable. The platform has a social network built in to help companies find new partnership opportunities along the supply chain. To date, more than 4,000 companies from 76 countries have joined, and 80% are SMEs.

Ikea is another global company that works with its suppliers to create sustainable value chains. It helps SMEs access renewable energy by negotiating bundled clean power contracts for groups of suppliers. Ikea expects all of its suppliers to sign a code of conduct that takes its cue from the 10 Principles of the UN Global Compact. This sets clear expectations for environmental, social, and working conditions, as well as animal welfare. But the group also has a “staircase model” that helps suppliers continually improve their ESG performance.

The UN Global Compact, the world’s largest corporate sustainability initiative, also stands ready to help SMEs through its “Local Networks”. These operate in 69 countries and are uniquely positioned to help companies understand what responsible business means within different national, cultural, and language contexts. Its SME engagement strategy is developing specific resources and programs tailored to the needs and interests of SMEs.

SMEs must seize every opportunity to embrace and advance ESG because there is no time to waste. We only have a few years left to alter the trajectory of our GHG emissions, reduce global inequalities, and achieve the substance of the 2030 Agenda for Sustainable Development. Individually, the contribution of each SME might be modest, but collectively they could make a whole world of a difference.