The COVID-19 pandemic changed the way businesses responded to consumer demand, and cast scrutiny on their ESG performance. Morgan Terigi, CEO and Co-Founder of Incomlend, examines the myths impacting ESG policy adoption by SMEs globally.
With a $3trillion finance trade gap now, Incomelend was set up to be a trusted financial partner to provide SMEs access to competitive and alternative non-recourse working capital solutions to safeguard their financial health and quickly capture new revenue opportunities, especially after an economic downturn.
There are many misconceptions out there surrounding ESG but the three biggest myths, according to Terigi, are that it focuses primarily on environmental protection; that ESG is expensive to implement and beyond the reach of SMEs; and that measuring the impact of ESG is complicated and can negatively affect SMEs. Unfortunately, these misconceptions are continuing to impact the adoption of robust ESG practices by SMEs globally. But, this needn’t be the case:
The covid-19 pandemic changed the way many businesses operate. As the months rolled on, business owners and top-level executives were forced to rethink strategies, including how they worked and, perhaps more importantly, how they responded to client and consumer demand. In addition to the day-to-day business, the pandemic cast increased scrutiny on how well businesses performed against their ESG goals. But, amidst the changes and policy reexamination, a number of misperceptions emerged – in some cases impacting the adoption of robust ESG practises by SMEs.
Undoubtedly, ESG reporting is a powerful vehicle for creating business value, a sustainable economy, and a more equitable world. What is also important to remember, however, is that ESG and profitability are now interlinked for business success. On a global scale, companies that prioritise sustainability practices are attracting greater reputational and financial support. Moreover, from a regulatory and legislative perspective, ESG issues are vital indicators of broader business risks, and more stringent reporting has led to greater transparency in these areas.
According to a recent Investment Association global survey, the UK has the highest percentage of investors incorporating ESG across their portfolio (30 per cent). Meanwhile, in a survey of UK consumers by PricewaterhouseCoopers, 67 per cent said ESG considerations are important for them.
As with many areas of business, the big hitters are ahead of the game, with most large companies having programmes in place to manage their risks. Many SME owners, however, are falling behind in this regard and in many cases, do not clearly understand how to implement an ESG strategy that can help deliver reputational and financial benefits.
Myth 1: ESG focuses primarily on environmental protection
Environmental protection is certainly a factor, but while climate change and environmental issues are commonly discussed, other sustainability initiatives include resource utilisation, employee wellness and safety, business ethics, and community engagement.
Adopting a strong ESG proposition can strengthen an SME’s corporate reputation, offering a competitive advantage to spur growth into new or existing markets. It is important not to underestimate the power of perception and customers, employees and investors are increasingly holding large companies accountable for ESG compliance across the ecosystem. As a result, these buyers are actively mapping their supply chain and auditing the ESG practices of suppliers and their vendors.
In addition, they are also beginning to encourage their Tier one suppliers to educate and assess next-tier suppliers on ESG compliance to mitigate overall reputational risk. With this in mind, SMEs that want to capitalise on global opportunities need to evaluate their ESG protocols and implement initiatives to address gaps. The alternative is they will potentially face the loss of sought-after contracts. Procurement may also choose to give preferential terms to suppliers that can show a robust ESG framework.
Myth 2: ESG is expensive to implement and beyond the reach of SMEs
This is a big one, with many SME owners believing that implementing a sustainability strategy is both expensive and complex. The truth is, it needn’t be either and, crucially, the benefits far outweigh the efforts. A positive ESG performance helps SMEs improve operational resilience and reduces their perceived downside risk. Studies show that businesses with ESG practices implemented can have superior financial performance and drive cost efficiencies than those without.
Having faced difficulties with covid-19, investors are increasingly looking to future-proof their portfolio against future disruptions in the supply chain and, as a result, are adopting sustainability investing practices. By integrating ESG into operational protocols, there is potential for SMEs to benefit from higher credit ratings and, at the same time, lower loan and credit default swap spreads. As well, it can unlock a larger pool of financing options, such as bank loans, direct investment, or other alternative financing arrangements.
Interestingly, SMEs who meet the ESG criteria and pass the financial assessment process can access quick turnaround invoice financing solutions with, for example, the Incomlend ESG Invoice Financing Programme – ESG-focused structured finance programme in Asia. Qualified SMEs can monetise their invoices three days after the shipment of their products, thus improving access to working capital to fund the next production cycle, pursue new opportunities, or even invest in greener technology to reduce their carbon footprint. The programme also connects socially conscious institutional investors with responsible, sustainable companies.
Myth 3: Measuring the impact of ESG is complicated and can negatively affect SMEs
No two companies are alike when it comes to ESG and standards of measurement and reporting vary by market and industry. Nonetheless, ESG is becoming a critical business fundamental. Of course, it can be daunting for SMEs, but local industry partners and government organisations are there to guide businesses on simple steps to identify and track ESG data.
Sustainable supply chain financing for SMEs will take a different approach to how these businesses are assessed and qualified, according to Terigi. Lenders will continue to consider their varying stages of maturity and resource constraints and customise criteria based on globally recognised frameworks.
The Incomlend ESG Invoice Financing Programme does not require SMEs to demonstrate ESG impact similar to large corporations. Instead, it uses established international standards such as the United Nations Principles on Business and Human Rights and the UN Sustainable Development Goals to assess its commitment to ESG.
Enhancing value creation through ESG
Changing consumer behaviours and regulatory requirements can be challenging, but, by getting ahead of the ESG curve, SMEs can tap into opportunities to strengthen business resilience, enhance cost efficiencies, drive innovation, and improve their competitive position. They will also leverage sustainable supply chain financing to access a broader range of working capital solutions to fund opportunities and grow their business
