An ESG aligned company may be better able to retain employees compared to another firm offering the same pay but not having ESG considerations in their operations.
The Indian regulatory landscape for ESG is changing fast. For instance, the Securities and Exchange Board of India (SEBI) mandates that the top 1,000 listed companies in terms of market capitalisation must adhere to ESG reporting through the business responsibility and sustainability report (BRSR). The Reserve Bank of India has also started indicating the importance of ESG for the financial institutions. As a result, integration of environmental, social, and governance (ESG) principles has emerged as a critical consideration for large corporate entities.
ESG is considered as a complex topic and carries a perception that it is difficult and costly to implement. However, over the years, several players have simplified the process and adapted it to various stages and sizes of companies to make it easy for SMEs and startups to adopt ESG practices. The SMEs have also started adopting these practices actively because of several reasons.
Seller/Buyer Expectations
SEBI has mandated that the top 1000 listed companies must make ESG disclosures for their value chain. The value chain must include both upstream and downstream partners of the listed entity, comprising at least 75% of its purchases/sales (by value) respectively. Now, the responsibility to report remains with the listed company but it is expected that the listed company would expect some of the data to come from the value chain partners. While in some cases the SMEs and startups may be expected to report some key ESG metrics, in some cases the process will resemble annual audits or third-party certifications. Value chain partners risk losing business from such companies if they do not track and report on all mandatory ESG parameters or fail to align with the listed company’s recommended sustainability policies. Therefore, for SMEs and startups that are part of the value chains of the top 1,000 companies, ESG is not an optional consideration, it is also a matter of staying relevant for a blue-chip buyer.
Expectations from potential investors
For startups and firms seeking external equity or debt capital, integrating ESG considerations are becoming a necessity. These factors are increasingly influencing investment decisions made by venture capital firms, family offices, and financial institutions, reflecting the significance placed on them by their investors or limited partners. Investors recognise that businesses incorporating these into their core operations not only mitigate risks but also position themselves to capitalise on growth opportunities.
By aligning their operations and growth strategies with ESG principles, startups and SMEs can distinguish themselves and appeal to investors who prioritise these values and investment criteria. Conversely, investors may refrain from investing in or categorise businesses as "un-investable" if they fail to integrate ESG considerations into their business models.
Expectations from the market
ESG initiatives offer startups and SMEs the opportunity to establish a unique identity in competitive markets. By prioritising sustainability, these businesses can present themselves as innovative, forward-looking, and resilient entities, resonating with an increasingly sustainability-oriented customer base. Adopting ESG practices provides startups and SMEs with a competitive advantage, bolstering their brand reputation and appealing to socially-conscious consumers. ESG reporting also plays a vital role in these companies' ability to attract and retain investors, customers, and employees.
Talent and retention
ESG-aligned companies tend to attract top-tier talent. These individuals seek companies that are more aligned with their values and sense of purpose in addition to the pay and satisfaction from work. Working for a company that contributes to ESG initiatives allows them to contribute to positive social and environmental impact while also advancing their careers. Building a workplace that is diverse, inclusive, and responsible can be recognised as a key asset for recruitment and retention efforts. High quality talent is sought out by employers even at a premium. An ESG aligned company may be better able to retain employees compared to another firm offering the same pay but not having ESG considerations in their operations.
Overcoming Hurdles in SME ESG Adoption
While the SMEs may prioritise ESG, they face significant obstacles in implementation. It is easier said than done. It is generally known that SMEs have lesser resources than large corporations. Many of them are in a survival mode and beyond ESG, they often need to figure out the basics like product or the market, etc. However, as discussed above, adopting ESG principles as a core of the operations has several benefits and SMEs and startups can start off with simple measures to improve the ESG “quotient” of the business.
To start off with, startups and SMEs can adopt policies that define/codify inclusion and climate smart measures as a part of their process. Guidance on good practices for SMEs and startups can be found on online sources.
Avishek Gupta is MD & CEO, Caspian Debt.