Engaging SMEs on sustainability

HAVING a conversation on sustainability with SMEs is often challenging. Faced with practical everyday challenges surrounding revenue growth, operational management and resource constraints, sustainability appears to be a luxury that SMEs cannot afford, a high-profile public relations campaign suitable only for the big boys in the market.

Yet, are SMEs at risk when they decide to shelf the sustainability discussion? The simple answer to that, is yes.

SUSTAINABILITY IS CRITICALLY RELEVANT

Corporate sustainability is defined as the ability of businesses to remain economically viable in the long term.

Staying sustainable as a business no longer just means safeguarding the bottom line now. It means that companies need to make the right investments to ensure that the current business model remains relevant amid the developments in the business landscape.

Faced with tremendous and rapid change in the market place, all businesses - regardless of size - need to respond to disruptions posed by technology. They are also faced with heightened stakeholder scrutiny over their business practices. In some ways, the sustainability conversation may be even more critical to SMEs than their larger counterparts who have deep pockets to support their business transformation journey.

UNDERSTANDING THE SUSTAINABILITY CONTEXT

SMEs operate in environments where they individually have limited influence. They are often part of regional or global supply chains, or partner other players to go-to-market.

To remain economically viable, SMEs therefore need to have a good grasp of how environmental, social and governance (ESG) issues directly impact them. They also need to consider how ESG issues impact their investors, customers, business partners and employees. Effective stakeholder management on ESG priorities and concerns can result in both risk management and bountiful opportunities for SMEs.

The financial markets have been responding to the global call for sustainable development. Assets under management by signatories to the United Nations Principles of Responsible Investing (UN PRI) grew from less than US$5 trillion in 2006 to nearly US$100 trillion in 2017. In a 2017 UN PRI report, it was observed that investors and credit rating agencies (CRAs) are ramping up efforts to consider ESG factors in credit risk analysis. CRAs and investors most frequently cite governance as the ESG factor that is likely to directly impact creditworthiness.

However, recent research by investors and CRAs suggest that their focus is intensifying on environmental and green factors in particular, and less so on social factors which are less tangible. Furthermore, the exponential growth in global green bond issuance (from US$155.5 billion in 2017 to an estimated US$300 billion in 2018) has set the impetus for an increased adoption of more energy efficient investments.

On the customer front, thanks to the rise of block chain and social media, customers now have more visibility over business practices. They also have more platforms to engage with companies and make their views known publicly. A 2015 Nielsen Global Corporate Sustainability Report which polled over 30,000 consumers from 60 countries found that 66 per cent of global consumers were willing to pay more for sustainable brands, an 11 per cent increase from 2014.

It also expected that this this upward trend will continue, as millennials - one of the largest generations in history - are about to move into their prime spending years; and 73 per cent of them were in favour of paying extra for sustainable offerings, a 12 per cent increase from 2014. Their younger counterparts, generation Z (under 20s) have also shown similar preferences, with 72 per cent of them willing to pay a premium for sustainable products, up from 55 per cent in 2014.

Besides improving their own sustainability performance, companies are now also working with their business partners along the supply chain. Many large companies now require their suppliers to minimally comply with their Supplier Code of Conduct. This usually includes certain sustainability related labour standards, health and safety requirements, and environmentally conscious practices, including reporting on carbon emissions, water consumption and suppliers' overall holistic environmental management systems.

The competition for talent is a real issue, especially in Singapore. To continue being able to attract the best people for the job, SMEs should not be competing in the job market based solely on compensation alone. Culture and staff development are key social aspects that SMEs should pay attention to. By rallying employees and providing them with a shared platform to contribute towards a bigger social cause, it appeals to their need for a greater purpose and self-actualisation.

In the US, an overwhelming number of individuals (92 per cent of millennials) have expressed a preference to seek opportunities at firms that contribute to society. Being engaged with the same goals lead to team building and strengthens the culture of the company. Employees tend to develop a greater sense of belonging, which improves staff commitment and loyalty in the process. Investing in staff training through well thought-out training content also indicates commitment to the well-being of employees. With continuous learning opportunities and growth, employees will have less reason to leave. Consequently, much can be saved through higher retention rates and less cost for retraining.

Against such a backdrop, and given the unique position of SMEs in the business eco-system, SMEs will need to align their management of these ESG issues with their business priorities and that of their key stakeholders to stay ahead of the competition. Pursuing a business strategy that takes into account the ESG issues is no longer a good-to-have, but rather a top priority for SMEs.

PRACTICAL STEPS

Leadership and governance are key to building a sustainable business. The successful navigation of developments that can impact the long-term economic viability of the company requires a clear holistic business strategy that goes beyond economic considerations to include ESG management. A strong tone from the top on the importance of sustainability, coupled with suitable key perfomance indicators that focus beyond short-term profitability, will drive positive company-wide behaviors.

Sustainability can result in direct cost savings for SMEs looking to operate lean. Low-hanging fruits include having in place a system that reduces energy, water and waste consumption. All this reduces carbon and utilities at zero cost, and can deliver substantial financial benefits.

SMEs can also take advantage of the many funding schemes in place to assist SMEs in their endeavours to engage in green projects and improve their return on investments. These include initiatives by the Building and Construction Authority to provide funding assistance for SMEs to improve the greenery at their premises, as well as the Energy Efficiency Fund which supports businesses in identifying, and undertaking energy efficient retrofits.

Investing in the right staff training to keep the workforce relevant is important to service and product differentiation. Building a ''sustainability first'' mindset among the staff means that the company is better positioned to adapt and respond to the rapid speed of technological advancements which can render conventional service offerings redundant overnight and meet the changing needs of stakeholders.

The growing global interest in sustainability is not a fad but a need. Finance Minister Heng Swee Keat affirmed that sustainability is a ''matter of survival'' for businesses at the recent Apex Corporate Sustainability Awards.

While we acknowledge that the sustainability journey is not an easy one, it is imperative to start on the journey now. Fret not, take small steps. Be inspired by Unilever's sustainability slogan: ''Small actions can make a big difference.'' A move towards sustainability is an evolution, not a revolution.

The writer is head of sustainability advisory & assurance at KPMG in Singapore