Sustainability slips in SMEs' priority, but it's key to long-term growth

Roundtable panellists:

Moderator: Lynette Tan, journalist, The Business Times

BEING sustainable may have fallen off small and medium-sized enterprises' (SMEs) list of priorities amid the global Covid-19 pandemic, but it's still as - if not more - important.

Industry observers point out that businesses with sustainable practices stand to benefit from cost reductions and a better reputation, among other things. On the flipside, those without may be cut off by clients looking to adhere to sustainability standards, or find it harder to access certain sources of funding.

Why is sustainability still an issue for some businesses?

Christie Chu: Based on the 2019/2020 Singapore Business Federation National Business Survey, 76 per cent of businesses surveyed felt little to no impact from the growing focus on climate change and environmental sustainability. In addition, many SMEs are still in survival mode following the "circuit breaker" so sustainability might not be viewed as a top priority now.

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But SMEs need to take a long-term view of growth. Sustainability will continue to grow in importance and with many SMEs already reviewing and rebuilding their business models because of the pandemic, it might actually be an opportune time to see how sustainability can also be factored in.

Deborah Heng: We think that firstly, there's still a misperception that sustainability is only for larger companies or when the business reaches a certain scale. But being sustainable can help businesses to strengthen their bottomline, establish a competitive advantage and enhance reputation - all critical elements to attracting investment, making it imperative that they focus on sustainability as a core pillar in their business strategy from the very beginning.

Some may also lack the right employees on board to successfully implement sustainability strategies. Without adequate internal policy and human resources, implementing sustainability practices and strategies can lead to a loss of resources, especially time and money, and even customers.

In addition, when starting out, the initial cost of integrating sustainability in the core business strategy, and reporting on it, can be challenging. That said, SMEs need to understand that this cost is a long-term investment.

Geoffrey Yeo: We've noticed that sustainability is not within the immediate priorities of most SMEs currently, especially as they are focusing on keeping their businesses afloat during the Covid-19 situation.

Another concern that's been commonly raised is the expected cost and resources needed to implement sustainability initiatives, which leads to a perception that pursuing sustainability is an additional cost rather than an advantage that SMEs can build.

Notwithstanding the current economic climate, SMEs should note that with rising awareness and demand for sustainability practices, products and services, sustainability is a new normal for all enterprises, and SMEs will be held to similar expectations.

Rather than viewing sustainability as an additional cost or a 'good-to-have', SMEs should leverage sustainability to 'future-proof' their businesses and address changing stakeholder expectations. It is also a long-term capability that they can leverage to access new opportunities and gain competitive advantage.

Sovann Giang: Well, there are still many business owners who cling on to the outdated notion that sustainability and profitability are conflicting goals. There is also a common belief that sustainability is costly and only applies to large corporations, as SMEs do not have the resources and expertise to embed sustainability in their operations.

But while these concerns may seem reasonable in theory, they are insignificant in practice. With the increasing number of stakeholders and investors calling for companies to pay attention to social and environmental impacts, sustainability in SMEs can bring about profitability with cost reduction measures, and improve access to markets and sustainable financing. In addition, the existing workforce can, with some training, develop the sustainability framework and implement it without the need for additional manpower.

What are the downsides for an SME not operating sustainably today?

Christie: Sustainability is not a trend, and it will only continue to gather momentum in the years to come. SMEs that are not operating sustainably today therefore need to act with a sense of urgency.

Distinctions should be made between short and long-term benefits. For instance, in the short term, money could be saved by putting off major projects that enhance a business' sustainable practices, but longer-term reputational risks could end up stalling growth.

On the other hand, businesses with sustainability as a core part of their strategy will be in a much better position to achieve long-term growth.

Geoffrey: With increasing pressure for businesses to adopt sustainability as a new normal, SMEs that are not operating sustainably may find themselves disadvantaged or losing out on business opportunities.

For instance, many larger enterprises have implemented sustainability policies that require their suppliers to comply with sustainability disclosure and standards, disadvantaging firms that have poor sustainability practices. This trend is likely to accelerate.

Governments around the world have also announced and accelerated their commitments towards sustainability as the Covid-19 pandemic underscores the importance to build a resilient and sustainable economy.

Companies with unsustainable practices will find themselves affected by new restrictions or requirements imposed on products deemed unsustainable, for example, or bans on single-use plastics.

Sustainability is also becoming more important for enterprises seeking financing. With the rise of green finance, banks and investors are integrating sustainability into their loan and investment evaluation frameworks.

SMEs that have not started addressing sustainability issues may find it more challenging to access such sources of financing in time to come.

Sovann: There are SMEs that view sustainability as a compliance exercise or goodwill gesture, but they stand to lose out on business opportunities. These may be opportunities to reduce costs or gain new customers.

Furthermore, the global banking and financial sector has begun to take sustainability into account in financing decisions.

If SMEs do not start acting today, they may lose better financing opportunities and increase compliance costs for tomorrow.

What does it mean for an SME in Singapore to be sustainable today?

Christie: Sustainability has entered mainstream consciousness over the last few years and we have seen a corresponding growth in the number of startups with a clear sustainability-based purpose and business model.

There is a growth opportunity here as consumers have become more discerning, and they want to support brands that share their beliefs.

Investors too, are placing a heavier emphasis on environmental, social and governance (ESG) criteria in their decision-making process. Businesses are increasingly more mindful of sustainability practices along their entire supply chain, including those of their SME suppliers.

Sustainability is therefore something that all SMEs need to consider. It is essential to the long-term viability of their business.

Deborah: At Mastercard, we define sustainability through three lenses: tensions between humanity and nature (that is, environment), the distinction between one and many (that is, inclusion), and the balance between creating short-term and long-term impact.

In terms of the environment, most SMEs, especially those in the manufacturing sector, are part of an extensive value-chain providing goods and services to large corporations that now typically prefer working with suppliers or partners that have eco-friendly and sustainable practices.

Also, we think that SMEs are well-positioned to create more inclusive economic growth. This is as they contribute greatly to job creation and overall economic growth, and can work with local governments and communities to empower people on the fringe and enable access to essential services and technologies.

Finally, the idea of creating social impact - from helping to recruit valuable talents to winning customer and partner loyalty - is gaining currency worldwide today.

SMEs need to rethink social responsibility and approach it creatively. This is a long-term investment and commitment, with unparalleled rewards in the future.

Geoffrey: A sustainable enterprise typically refers to a business that commits to environmental and social responsibilities beyond economic impact, and integrates sustainability into business strategy.

The areas relevant to an SME pursuing sustainability would depend on the sector it is from and the nature of its business.

But in general, there are some key environmental issues that it should take note of.

These include the need to reduce carbon emissions, better manage waste, and use resources more efficiently and sustainably.

Also, SMEs, as socially responsible corporate entities, would need to ensure fair HR treatment and practices at the workplace, especially if they have operations or suppliers in developing countries.

Overall, SMEs should view sustainability as a means to achieve long-term value for their business, as it can enable them to become more resource efficient, mitigate business risks and open up new revenue streams.

How would you advise SMEs starting out on their sustainability journey?

Christie: Cost might be a hurdle. Achieving energy efficiency for instance, could require better and newer equipment, and that involves initial cash outlay.

Innovation, in order to develop new, sustainability-related product lines, would also incur costs.

But cash savings and even revenue growth could result down the line; sustainability need not be at odds with profitability.

For financing support, SMEs can take advantage of schemes like the Productivity Solutions Grant or consider bank loans, given the low interest rate environment that we are still in.

Deborah: The successful implementation of sustainable business practices starts with strong leadership.

A strong advocate of sustainability at top management can drive the business in the right direction and open a whole new world of opportunities.

Geoffrey: SMEs have shared that the broad scope of sustainability and the complex landscape of sustainability frameworks and standards can be overwhelming.

So, instead of tackling all the issues at once, SMEs could start on the sustainability journey by adopting a bite-sized approach.

Depending on their sector and nature of business, SMEs can identify key areas that have greater impact on their businesses and focus on making improvements in those areas.

This could include incorporating the use of sustainable materials, or reducing carbon emissions as part of their production process.

Once the SMEs are more familiar with the broader sustainability issues affecting them, they can then work on other areas and develop more deliberate plans to integrate sustainability into their business strategy.

Sovann: SMEs can capitalise on the growth of sustainable finance and its emerging instruments, such as green bonds and sustainability-linked loans, to kick-start their sustainability development.

In certain industries, sustainable development may require companies to reframe, restructure, and re-evaluate their systems, policies and practices.

In this case, companies should identify their key sustainability risks and opportunities, set achievable and rational sustainability targets, establish responsibility for sustainability at the board level, and distribute it across the company's leadership.

If needed, they can also reach out to sustainability consulting firms for further support and guidance.