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The Importance of Sustainability for Small and Midsized Companies

Christian Neumann
Christian Neumann
March 8, 2023
7 minutes
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Transforming companies to address sustainability including saving the planet from climate change and resource scarcity are topics of concerns for businesses around the globe. Terms such as “decarbonization,” “sustainability,” and Environmental, Social, and Governance (“ESG”) can be heard in most boardrooms and on national TV. 

But what if you are the owner of a small or midsized enterprise (SME)? What role should you play in sustainability? Is there something different that you must do since sustainability regulations might be white noise to you as you strive to continue your business and support customers despite supply chain shortages, pandemics, natural disasters, and global inflation?

Some may argue that SMEs are different than large corporations and don’t need to adhere to the same sustainability practices, but the need to be sustainably responsible must be part of every leader’s vision. For example, SMEs make up about one-third of the gross domestic product and employ close to 60 percent of the population in countries such as Austria, Germany, Switzerland, and the United States. However, they are also responsible for upwards of 70 percent of the environmental pollution caused by industry in general.

If sustainability strategy and implementation are done correctly, it can lead to value creation for your SME. But there are consequences if sustainability is not part of the long-range company vision. According to leaders at the Cambridge Institute for Sustainability Leadership, “firms that aren’t proactive on sustainability were in danger of being left behind.”
That state of being ‘left behind’ includes losing customers, talent, and in some extreme cases even the business.

 

Six steps for SMEs to be future ready now

Here are six fundamental activities that SME leaders need to do today to drive tomorrow’s success:

1. Lay the groundwork for sustainability transformation with transparency on the status quo.
It is essential to first understand where your company is regarding each aspect of ESG. As a research exercise, our team analyzed the sustainability maturity level of 20+ companies and found highly varying results with the majority (~75%) of the companies studied at an early stage of their sustainability journey. The lower ranking often equates to not having a clear vision or position on what the company wants to do with sustainability. In these situations, there are missing goals or no sustainability initiatives in place. Knowing where your company is with sustainability is the baseline from which to build the sustainability plan. 

2. Understand the requirements of upcoming regulations for your company, customers, and suppliers.
Have you heard of the EU Corporate Sustainability Reporting Directive or the Supply Chain Act in Germany? Maybe you are familiar with the United States Security and Exchange Commission’s (SEC) new climate risk disclosure rule?

These are just a few examples of the many regulations in place or coming shortly that will impact SMEs. Even if reporting requirements target enterprises, SMEs are part of that supply chain and will need to meet certain standards to maintain their business. 

Various studies have indicated that there is a lack of accountability and ownership for ESG in SMEs. This must change. Partnering with an experienced company that can screen regulatory changes and ensures that your company stays up-to-date in regulatory topics is a place to start. This will help your company identify risks earlier and take precautions instead of reacting to each regulation separately. SMEs must align with all counterparts across the entire value chain proactively, understanding as early as possible what they need to do to meet respective regulatory and customer requirements. Leaders may consider collaborating with a partner for regulatory questions especially if a high number of regulations apply to your specific business, i.e. if a company operates in different markets, has a broad product portfolio, or if the industry is highly regulated.

3. Embed sustainability in your company strategy.
A survey conducted by Commerzbank showed that 62% of small- and mid-sized companies in Germany do not have a sustainability strategy. (1) Another study found in Austria 37% of SMEs with 30-2000 employees have no sustainability strategy.

Embedding sustainability in strategy offers high potential for SMEs to react to increasing regulatory and stakeholder demand. To do this, you can compile the assessment of your status quo and any regulatory / stakeholder requirements. Then, translate the insights into concrete ESG goals and strategies relevant to your business and define specific action items to address key pain points. Business strategy development will be improved when planning sustainable initiatives.

There are also fines connected to non-compliance. SMEs risk missing out on business opportunities if they do not demonstrate a sustainability roadmap.

4. Show commitment to sustainability and connect with key stakeholders through shared values.
It would be game-changing for SMEs to not only embed sustainability into business objectives and mission, but also to communicate the status quo and goals transparently. When the vision, strategy, progress, and roadmap for sustainability are clearly defined and communicated, the company effectively establishes a sustainable brand that resonates with different stakeholders, thus convincing them to further engage with your business.

Sustainability activities should also come through in employer branding and marketing activities (e.g., social media, company website). One advantage of sustainable positioning is higher recognition and attraction for talent as young workers have indicated growing preference for mission-led companies. In 2021, research by IBM Institute for Business Value revealed that around 70% of potential employees are more likely to work for socially responsible or environmentally sustainable organizations

In its business case for sustainability, the Harvard Business Review, wrote: “Companies that invest in sustainability initiatives tend to create sought-after culture and engagement due to company strategy focusing more on purpose and providing value to society. In addition, companies who embed sustainability in their core business strategy treat employees as critical stakeholders, just as important as shareholders.”

 

5. Quantify ESG activities to make your success transparent.
One of the basics for a successful sustainability journey is to define suitable key performance indicators (KPIs) and track progress. Each industry will have its own ESG KPIs. However, there are some key fundamentals that can help any business shape its KPIs, including: 

1. Understanding KPI requirements from regulatory bodies and stakeholders 
2. Prioritizing KPIs, proving feasibility, and defining realistic targets 
3. Implementing in alignment with ESG strategy and roadmap

Many SMEs are often unaware of the connection between ESG KPIs and possible financial support available to them. One source of funding assistance that has become very attractive and is spreading across the globe, is sustainability-linked loans (SLL). According to Refinitiv data, SLL issuance tripled its previous record to reach a volume of $717 billion in 2021. For each SLL, lending institutions typically offer 5-10% margin discount to borrowers if they meet certain KPIs, which could be either third-party ESG ratings, or specific KPIs applicable to the borrowers’ industry, country, or company size.

An example of a company taking advantage of this financial support is a mid-sized waste management company in Germany that secured an ESG rating-linked loan, from which they benefit with loan discounts whenever they receive a rating upgrade from the external rating agency. (2) Another family-owned German luxury cosmetics business managed to link an SLL with its annual CO2 emissions reduction target. (3)

Meanwhile, The Straits Times reports that one bank lending to SMEs for sustainable projects was set to reach over $3 billion by the end of 2022: “These loans cover over 600 SMEs across Singapore, Malaysia, and Hong Kong. Most of these loans relate to the built environment, and another quarter are tied to renewables and energy efficiency.”

 

6. Embrace digitalization because it is the key to sustainability success.
Efficient sustainability transformation can only be possible with implementing digital transformation.

Digitalization helps with real-time collection of data to identify problems that cause waste or unnecessary energy loss. Using digital technology correctly has the potential to reduce a company’s carbon footprint and drive optimization in energy consumption. 

Another key benefit of digitalization for SMEs is in Sustainability Reporting adherence – a key component of transparent sustainability. Strong capabilities in digital tools and data analytics, as well as automation of data collection and analysis, can help reduce efforts in reporting activities. Digital tools can also support the monitoring and visualization of KPIs.

It's important to note that whether the SME has the technology skills in house or partners with a specialist, there needs to be investment in, and an understanding of, advanced technologies like Artificial Intelligence (AI), Industry of Things IoT, and Blockchain and how they might benefit the organization. 

One example of a company that made the investment and saw the benefits of digitalization is a Spanish automotive supplier that saved energy through data analytics. A cloud-based application gathered data every one or two seconds from plant machinery in individual production plants around the world collecting approximately 800 million data points daily. This gave the company access to data on electricity and gas consumption in real time. Thanks to reduced energy consumption, the company has been able to lower its CO2 emissions by 15%. In 2016, the company emitted 14,000 fewer tonnes of CO2 than the previous year, and by 2017, it had saved a massive 16,000 tonnes. That’s the equivalent of taking approximately 3,200 cars off the road. 

Despite the possibilities of success, a study found that while 96% of global decision makers view digitalization as ‘essential to sustainability’ only 35% of surveyed firms have implemented Industrial Internet of Things (IIoT) at scale. While this demonstrates that the value of digitalization and sustainability is recognized, it also shows that the adoption of relevant digital solutions to enable better decisions and achieve sustainability goals needs to accelerate particularly in the manufacturing, energy, buildings, and transportation fields.

Putting it all together

It is important that SMEs view sustainability as a competitive advantage, not a burden. 

It is a “must do” not a “nice-to-have” add-on. The bottom line – sustainability impacts every business no matter the size, geographical location, or financials.

As we also read in the Harvard Business Review, prioritizing sustainability initiatives not only leads to a desirable work culture and increased employee engagement but also highlights the importance of employees as critical stakeholders in addition to shareholders. 

Demonstrating sustainability success leads to new opportunities to reinvent, differentiate, reposition, expand, and (re)claim market territory. With the size of the SME market globally, the cumulative effect of small changes in SMEs can make a real difference to the environment.

 

 

Additional Sources:

(1) According to a 2021 study by Unternehmerperspektiven, an initiative of Commerzbank.

(2) Knettenbrech + Gurdulic secured a sustainability-linked loan facility from LBBW, which tracks the company’s ESG rating by EcoVadis.

(3) Babor secured a sustainability-linked loan facility from Deutsche Bank in 2021.

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Christian Neumann
Christian Neumann
Global Consulting Head Sustainability Business