Tips for Approaching ESG Systems as an SME
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Sustainable impact and innovation were top of mind for Jeffrey Crawford when he joined as vice president of sustainability at Sustana, a sustainable recycled fiber, and paper manufacturer that Blackstone recently acquired. Since the acquisition, the company has been taking a closer look at its ESG (environmental, social and governance) performance and strengthening its integration internally and throughout its value chain.
Pursuing regulatory compliance and competitive ESG performance can involve significant investments of time and, yes, money — especially for a small or medium-sized enterprise (SME), Crawford told TriplePundit. Even so, in expanding its ESG initiatives, Sustana is not only able to avoid business risks, but also engage top-notch customers. The same results are possible for all SMEs.
The business benefits keep rolling in: Prioritize ESG systems
Companies that rank highly on ESG indicators tend to perform strongly. For Sustana, prioritizing ESG issues has positioned the company as an attractive business partner, Crawford said, as risk mitigation is an underlying benefit of ESG. On the environmental side, risks could include climate, water and energy security, while social risks include labor security and boycotts. In addition, poor governance can lead to corruption and disrupt internal and external communication channels.
To strengthen its ESG management, Sustana conducted a materiality assessment that engaged its key stakeholders. To maximize its impact, the company has leveraged its influence for good by focusing on key issues, Crawford said. These are climate change, circularity, water, energy, and sustainable supply chains, to name a few.
Along with expanding recycled fiber offerings, the company has leveraged biogas to power its operations. Crawford said the company also procures supplies from areas with a low risk for corruption and human rights abuses while working with suppliers to further mitigate social and climate risks. Sustana avoids sites near key biodiversity, as well.
Those ESG ambitions spur innovation, and Sustana is the first and only company to sell recycled fiber that is FDA-compliant for direct contact with food.
“So many brands have recycled content and climate mitigation targets, and we’ve been a solution for them,” Crawford said. “However, we're just a medium-sized company. We’re trying to use as much power and leverage as we have, but we need to collaborate with others in this industry to have a greater impact.”
What can SMEs do to make progress on ESG?
ESG reporting standards and regulations are evolving rapidly and will, directly and indirectly, impact SMEs. To stay competitive, SMEs should ensure they are advancing their ESG initiatives and reducing their greenhouse gas emissions. For example, Canada’s carbon pricing system and the European Union’s carbon border adjustment mechanism are expected to have direct cost impacts on businesses operating in or entering those markets.
Although they’re just starting to feel pressure from regulators, investors, customers, and larger companies that are engaging their supply chains to report on ESG data and risks, Crawford said SMEs have no time to waste: “It’s a lot to do in a very short period of time.”
Here’s a taste of what he advises for SMEs:
Codify your purpose and principles. Have you drilled down into your organization’s purpose? Officially defining the organization’s purpose and externally committing to principles, like the United Nations Global Compact’s on the environment, human rights, labor, and anti-corruption, help focus efforts and hold the company accountable. In addition, regularly conduct ESG materiality assessments, which will identify your risks and opportunities for impact, Crawford advised.
Establish ESG governance and risk oversight. Establishing effective oversight of ESG risks and performance at the board and senior management levels is critical. SMEs can accomplish this by establishing ESG committees or adding responsibilities to existing committees. ESG topics like climate change represent risks for many companies. Integrating these into existing enterprise risk management (ERM) systems and processes will improve resilience.
Start tracking your progress. You’ll need to decide which reporting framework you’ll use and then gather data to establish baseline performance. The data you report externally will need to be investor-grade, comparable and collected through auditable processes, Crawford said.
Build the business case internally. Crawford recommends conducting an internal audit of the company’s ability to report externally in accordance with ESG reporting standards. Invite and lean on the finance team to support this effort. “They tend to have strong familiarity with processes and controls, and their opinion holds weight with senior leadership,” he said.
Work smarter, not harder. Once you’ve established a baseline performance, you can start setting targets and risk tolerances, develop critical data processes and controls, and better manage your risks. It’s smart to automate as many of your data collection and reporting processes as possible, using systems designed for risk and ESG data management.
Engage with your stakeholders. As you get your own house in order, begin to engage suppliers and customers. Provide opportunities for suppliers on key issues and open their eyes to their business case for ESG. The data you’ve been collecting on the risks and benefits of your burgeoning initiatives will help with your argument.
Connect with your peers. Continue growing by joining and supporting the right groups, initiatives, and industry associations. Here’s where collaborating with suppliers and customers to show support for progressive sustainability legislation comes in. Crawford also lauds the Science-Based Targets initiative, which presents an implementable path for each sector to move toward the aim of the Paris Agreement.
The bottom line: Now is the time to act for SMEs
Crawford warned that SMEs don’t have any time to lose, especially as large companies integrate vendor ESG performance into their procurement decisions and cut organizations from their supply chains with high ESG risks. But consistent baby steps lead companies forward. Continue building the capacity of employees and the organizations in your value chain on sustainability issues and building out your ESG systems, and you will see results, he said.
