What is ESG? How small businesses can make a positive social impact

Environmental, social, and governance (ESG) factors are used to measure a business on its sustainability, ethics, and impact on the community. Going beyond profitability and performance, these factors look at how energy and resources are used within a business and how that impacts the world around us.

As a certified B Corp, Simply Business is clear on our responsibilities to protect our planet. From looking at ways to improve the lives of our customers and employees to giving back through our charity initiatives, we take our social responsibility seriously.

While ESG may sound like something reserved for bigger businesses, the role small businesses play in driving positive social change is becoming increasingly important. And it doesn’t necessarily need to involve a large budget or investment to make a difference.

The UK’s small businesses make up 99 per cent of all British businesses, so even small changes at this scale have the potential to make an impact. And their role at the heart of our towns and cities across the country means small businesses can support sustainable communities by hiring locally and stimulating the local economy.

What is environmental, social, and governance?

ESG is the term used for assessing a company’s sustainability standards. Essentially, it’s defined by the policies and frameworks a business puts in place around these key areas:

• environmental – the energy and resources a business uses, including carbon emissions and waste
• social – how you support people within your business and your local community, for example through employee wellbeing, charity fundraising, or diversity, equity, and inclusion
• governance – how you govern, make ethical decisions, and stay within the law while running your business. For example, factoring how your decisions could impact stakeholders, consumers, and investors

Environmental, social, and governance are the three ESG principles that will underpin your strategy.

Should small businesses implement an ESG strategy?

There are many reasons why a small business could benefit from creating an ESG strategy, from attracting investment to showing your brand values.

Sustainable finance is increasingly important as the UK strives to achieve net zero targets and invest in renewable solutions. Although this can be challenging to access for small businesses.

Customers are looking for brands that show they care about more than just their product or service and making money. In fact, reducing carbon footprint is one of the most important environmentally and ethical values for consumers when buying from a brand, according to Deloitte’s latest sustainability report.

Reducing your ESG footprint could help you win investment. Banks look at ESG when deciding whether to loan money to a business, and there’s a rise of ‘green bonds’ and ‘sustainable bonds’ available.

How your business supports employees is a key part of ESG and creating a positive workplace culture can boost productivity and attract people to work with you.

Finally, while moving the dial on sustainability efforts can sound daunting and costly, there may be changes you can make that actually reduce your costs. For example, taking action to reduce waste in your business can save resources and energy.

How to implement an ESG policy for a small business in 5 steps

1. Analyse your business

Your business will already be having an impact on your customers, suppliers, the community and the world around you. The first step is acknowledging that this relationship already exists and then understanding where this impact is positive, neutral or negative.

Start by thinking about the whole lifecycle of your product or service. Consider your supply chain and where your materials come from. By talking to your suppliers you might find areas where you can reduce waste or switch to more renewable providers.

If you have employees, ask them to complete a survey to help you understand how you can better support employee wellbeing or improve diversity, equity, and inclusion.

Stakeholder interviews are another useful way to gather data as you benchmark your business performance against ESG factors.

2. Set meaningful ESG goals

What are you going to do to reduce your impact in these areas? It’s a good idea to make sure goals are SMART (specific, measurable, achievable, realistic, and timely).

If setting goals for positive impact seems too far out of reach for now, start by aiming for your impact to be neutral. Start with the goal to 'do not harm' – with this philosophy you can set goals for improvement.

Some goals will be easy to measure but some might just need your ‘best guess’. This is still useful and helps you understand if you’re heading in the right direction.

3. Consider your budget

It can be overwhelming when thinking about all the things you could do to improve your ESG rating. But it’s important to make sure you stick to a realistic budget and make changes over time.

We know from our SME Insights Report research that over half of the UK’s small businesses are held back by the financial cost of implementing their sustainability goals. Making small changes within your supply chain, or larger changes when it comes to product development can all play a part here.

4. Start improving ESG

Now you know what you need to focus on, you can start making changes. For example, can you look at a new supplier for your packaging and choose a more sustainable material? Or can you replace single-use cups in your office with reusable ones?

To help you know what to focus on and where you can make a difference, it can be helpful to ask yourself this question: Could doing this action create a positive impact that wouldn’t happen otherwise?

5. Report on your progress

Transparent ESG reporting is an essential part of implementing this and being successful. You’ll likely have a mix of long and short-term goals, and will have a list of activities you need to do to achieve them. Communicating how you’re getting on to shareholders and investors is important here.

For example, you might want to create a sustainability report and include details of ESG initiatives you’re working on.

How to measure your ESG rating?

ESG performance is based on a range of factors and metrics – there’s no one measure to know how you’re doing.

You could start by looking at:

• this carbon emissions calculator from SME Climate Hub to help you measure your environmental impact
• the level of diversity and inclusion in your workplace
• your impact on your community or customers
• how you report on progress to improve your governance

One tip is to try not to just talk about positive impact. Be honest about areas where you need to improve and this will help you build trust.

ESG policy ideas you could use for your business

Environmental and social issues cover a broad range of areas, but here’s a few ideas:

• looking after employee wellbeing
• supporting diversity, equity, and inclusion
• choosing sustainable materials and embracing the circular economy
• reducing transport miles and resources your business uses
• raising money for local causes
• reducing waste and water usage, from paper to unnecessary packaging
• embracing new technologies to make your business more efficient

For example, here at Simply Business we’re focused on giving back. We’ve had volunteer teams trek across jungles, the Sahara, and even the Arctic to raise money for our charity partners – this year’s team hopes to raise £20,000 as they trek across Cambodia.

Having a big ambition and small goals to help you get there is key to making an impact.

For example, Y.O.U underwear is a small business with a mission: “Everyone should enjoy our slow fashion underwear, and we celebrate all body types.” They’re committed to putting purpose over profit and have smaller goals – like donating to charity and using sustainable manufacturers – to help them on their journey.

If you’re not sure where to start, look for guidance on ESG principles and sustainability from accredited industry bodies to find specific information for your trade.

What is ESG investing?

Investors are increasingly looking at a company’s ESG rating when deciding whether to finance it. So, if you’re looking for investment to grow your business, then taking steps to improve your ESG could be a good move.

Of course investors will still look at profitability and turnover to support their financing decisions. But showing that you can make a positive impact on the environment and society could make you an attractive proposition.

Even judges for our annual Business Boost cash grant look at how a business contributes positively to society when deciding who should win the £25,000 business investment.

Have you got an ESG strategy for your small business? Let us know your tips in the comments below.

More guides for small businesses

• What is a B Corp?
• How to create a sustainable fashion brand – tips from small business owners
• What employee benefits can attract new hires to your business?
• How much employers’ liability insurance do I need?