Most pioneering businesses implementing environmental, social, and governance (ESG) criteria are large corporations. So what obstacles are hindering small- and medium-sized enterprises (SMEs) from considering this operational model?

Jordan Lee, manager of the Tony Blair Institute for Global Change

ESG standards have become a critical framework for sustainable business practice, providing companies with metrics, processes, and tools to assess their performance and impact on a host of non-financial factors. The link between development and ESG is particularly visible in the environment component where growing energy demand, urbanisation, and industry output have tangible impacts on the natural environment.

Related initiatives have been growing in importance in recent decades, with KPMG finding that 96 per cent of the top 250 companies in the world by revenue reported ESG data in 2022, up from 45 per cent in 2022. While the challenges are multifaceted, there are four key ones that companies face regarding implementing ESG campaigns: higher upfront capital costs, lack of expertise, lack of data, and complex reporting guidelines.

Challenges one and two are particularly pertinent for SMEs as they lack the large balance sheets and workforces of larger companies to support ESG programmes.

The adoption of off-grid renewable energy resources provides a clear example of the challenges SMEs face. While a privately owned solar array may reduce an SME’s electricity cost in the long run, installing it likely requires a significant initial investment as renewables tend to have relatively high up-front capital costs, which are somewhat compensated over time due to the lack of fuel costs.

Not only are SMEs less likely to have the spare capital to make this investment, they may also find it difficult to borrow money. A lack of relevant expertise is also particularly challenging for SMEs as hiring a new employee dedicated to ESG topics would likely represent a significant rise in headcount.

To transition to a sustainable business model, where should SMEs start?

Implementation roadmaps can differ significantly across sectors, but a common first step is contextualising the broad ESG umbrella for a given company’s context by identifying which topics, initiatives, and metrics are most relevant to their industry, business model, and external stakeholders.

A possible second step involves conducting a materiality assessment to determine how important the prioritised ESG topics, initiatives, and metrics are for the company’s business process.

For example, reducing water consumption is often a high-priority ESG initiative, but putting this initiative in progress may be much easier for an SME focused on retail than it is for one in agriculture. At this stage, an SME can determine what data, if any, it already collects that supports priority ESG initiatives that the company could implement without fundamental changes in its business model.

From this point, companies will be well positioned to start implementing initiatives if the appropriate enabling environment is in place. Measures that encourage ESG reporting are a key element of this enabling environment as they provide businesses an opportunity to highlight their performance and can even incentivise companies to report their sustainability data through linking improving performance to financial benefits.

How do you assess the integration of ESG and digitalisation, and is this the perfect dual to support businesses of all sizes?

Digitalisation is key for implementing ESG programmes because it enables more accurate, comprehensive, and timely collection and analysis of all data, including ESG data.

This allows companies to track their progress on various factors and communicate that progress to external stakeholders. The ability to collect and broadcast high-quality sustainability data to public audiences is crucial in helping companies realise commercial benefits from implementing relevant initiatives.

For example, a company that invests in digital solutions for energy use management may be able to reduce its energy consumption and carbon footprint significantly. The company can then use this data to demonstrate its progress on environmental sustainability, and this achievement may open the doors to new customers.

What effective solutions exist for businesses to access green financing sources and turn sustainable development criteria into reality?

Green finance is a particularly powerful tool to facilitate more widespread implementation of ESG initiatives. It is a very broad field, though some of the most prominent green finance products include green bonds and loans that are either dedicated to environmentally beneficial projects or give preferential financing to projects that can demonstrate improved environmental performance. Carbon, nature, and biodiversity credits are other prominent tools.

There are several steps that companies can take to access green finance. One of the first and most important steps is engaging with financial institutions that offer green financing to understand their specific requirements. Similarly, companies can network with industry associations and participate in forums to acquire insights into emerging green finance opportunities.

Governments also play a pivotal role in shaping the ecosystem for green finance, and the government of Vietnam is taking steps to help make sustainable investment flourish.

However, realising Vietnam’s green finance ambitions will require additional initiatives, such as updating the country’s green taxonomy to provide the latest definitions and classifications of sustainable investments. An updated taxonomy would facilitate increased provision of green finance by providing guidance to local and international investors on which investment opportunities are genuinely green.