Reporting on ESG – environmental, social and governance – criteria may be viewed by SMEs as a burden, as it creates more work for businesses that have limited resources.
However, as three speakers from ESG Matters explained at our 13 July event, all companies will likely need to follow ESG guidelines in the near future. SMEs should start planning now so they are prepared for tighter regulations and a more sustainable future.
Currently, only listed companies in Hong Kong are required to submit their ESG records on a yearly basis, but these big corporates must also pay attention to the ESG practices of the other businesses they deal with.
“Many SMEs are part of the supply chain, and they supply goods and services to large companies,” said Technical Director James Choi. “In the near future, they will need to comply with the same requirements.”
This provides challenges for smaller businesses, but also opportunities for those that get ahead of the competition on ESG practices.
Lavin Yeung, Head of Business Development and Marketing, said having clear ESG policies in place can deliver other benefits, such as attracting customers who are concerned about sustainability. It can also help small businesses access funds.
“Banks are more willing to support this marketing shift and invest in companies concerned with ESG,” she said. “They are also more willing to lend money to develop green products and services.”
For many SMEs, however, it may be difficult to know where to start. Yeung suggested that business owners could check out the guidelines provided by Hong Kong Exchanges and Clearing (HKEX). They can also read the ESG reports of listed companies that are available on their websites.
While there is no standard approach to integrating ESG, Yeung recommended a few key stages. First, businesses should dedicate a cross-functional team, as ESG is a very broad topic.
“Even in a small company, it is important for all employees to understand ESG, so training sessions will help them understand,” she explained. “After training in the key topics, management will be better able to set up policies that are suitable for the business.”
Companies also need to understand the needs of their customers and suppliers, which will depend on where they are located.
“There will be more regulations to come, and your customers may have to adhere to different international rules, so your agreements and instructions may change over time,” she said.
Knowing your competitors can not only help businesses to thrive, but can also be a source of inspiration. Some smaller businesses including start-ups post their ESG reports and sustainable activity online.
To fulfil the “social” side of the ESG equation, Yeung said that businesses can collect data on staff well-being including wage levels, training hours, and policies to support work-life balance.
Choi then explained how technology can be used to collect and report ESG activity. He noted that many companies already use digital platforms for accounting and annual leave. They can design their own ESG platform, or use one of the ones that are already on the market, such as ESG Matters’ platform, ESG Dashboard, which is designed to align with HKEX’s disclosure requirements.
Choi added that technology such as virtual reality can also help in areas including training staff.
“ESG reporting requires companies to include the number of training hours that have been carried out,” he explained. “Virtual reality technology enables training to be done remotely and efficiently.”
Summing up, Dr Glenn Frommer, Founder of ESG Matters, said that it was important for SMEs to take action now and not to wait, as regulations are coming soon. Mainland China and the European Union already have taxonomy for ESG, he said, and the United States is not far behind.
While ESG reporting may seem daunting for SMEs, there are certain actions they can take that are not complicated.
“The easiest thing for small businesses to start with is to collect information on their energy use, and convert it to carbon emissions,” Frommer said. It is also straightforward to collect social data, such as workforce diversity, the amount of training provided, and policies such as support for families.
He added that another benefit for investing on the social side of ESG and improving the work environment is reducing staff turnover, and therefore the cost of recruiting, for businesses.