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ESG and Corporate Purpose – Conflict or Convergence?

May 15, 2024

Contributed by: Dafferns.

Climate change is happening now! With the extreme weather events of recent years, it has surely become impossible to deny that human activity is having an adverse effect on our planet’s ecosystems.

Wherever you look in the world, we are all being impacted by our changing environment – just speak to local farmers and you’ll soon understand the extent of the concern they have for a successful harvest this year. It won’t surprise you to learn that the winter of 2023/24 was the wettest on record in Coventry (according to the Bablake weather station).

What does ESG mean for your business today?

What does this have to do with businesses I hear you say? Well, all businesses exist for a common purpose and that is to make money. But this statement has become incredibly simplistic. This is because businesses must also have regard to their impact on their stakeholders, meaning their employees, customers, suppliers and their environment, as well as their shareholders. If the purpose of the business is to make money at the expense of all else, it will soon wither and die in this internet dominated age because it will rapidly become unpopular with one or more groups of its stakeholders. This means that all businesses must now be acutely aware of their impact on the environment – whether local or further afield.

ESG (Environmental, Social and Governance) has risen to prominence in recent years as a means of setting the standards by which businesses should be held to account. The three aspects of ESG taken together guide businesses on how they should act to create a sustainable future, not just for the business itself, but for all of its stakeholders too.

ESG measurement and reporting is in its infancy, but already leaders of large organisations are pointing to ESG goals when discussing purpose and are actively pursuing the ideal balance between profit initiatives and impact on stakeholders.

Coventry & Warwickshire First’s ESG roundtable discussion

In April 2024, Martin Gibbs and I attended Coventry & Warwickshire First’s ESG roundtable discussion led by Gary Adlen of Carbon Happy World. One of the standout quotes from the evening was that:

“We are at a VHS/Betamax moment in terms of the standards and regulations being laid down by the many different ESG oversight organisations – we don’t know which way it is going to go, but we have to get moving anyway.“ – Gary Adlen of Carbon Happy World

“In this scenario, trust is critical – we have to take action and trust that we will be fairly judged as long as we try to do the right thing and, importantly, trust that those around us will uphold their end of the bargain too”.

Who cares wins

Between 2004 and 2020, based on internet search history, there was limited interest in ESG. Since April 2020 a small increase in interest has morphed into a cacophony of noise where everyone seems to be talking about it (or is that just my perspective?). The impact on business of this sea change in public sentiment is encapsulated by the title of the United Nations Global Compact Report – Who Cares Wins (which, incidentally, is where the term “ESG” first appeared way back in 2004).

The trickle down of ESG to SMEs

The common refrain you might hear is “ESG doesn’t apply to SMEs, does it?”. Well, from a regulatory point of view, that’s still true, but the trickle-down effect from large organisations is already starting to bite. And that’s before you even start to think about the moral argument.

For many SMEs there will be increasing pressure from large customers for their ESG standards to be consistent with the requirements being placed on big businesses. ESG measurement will take into account the carbon footprint of the downstream supply chain, as well as the direct impact of a business’ own actions. As such, SMEs supplying into large organisations are soon going to find themselves out of business if they can’t meet the exacting ESG requirements of their customers. Surveys suggest UK SMEs are lagging behind in this respect, but we have the skills to catch up quickly.

At the smaller end of small business, over 75% of firms have no plans to implement ESG practices in the near future, citing either staffing or cost as barriers, or a perception that it is hard to commit to the standards. This sense of inaccessibility to smaller businesses makes real benefits blurred to many.

This point was echoed by Gary Adlen, our guest speaker at the CWF roundtable dinner, who commented:

“There is a sense of pushing away, it’s the planet’s problem, not yet a deep enough understanding, not our problem”; and regarding small business adoption “until the threat of losing business lands, behaviours will be slow to change”. – Gary Adlen of Carbon Happy World

But this is missing the bigger picture. In this inter-connected world, it is impossible to hide any longer, so even micro businesses need to be taking action if they want to maintain a good reputation. More and more, customers are going to be driven in their buying decisions by the ethical stance of the supplier and ESG is fast becoming the over-arching measure of a business’ ethics (if it hasn’t already!).

Then there is the impact on employees. Perhaps more than ever before, there is a war for talent going on, so employers need to be projecting the right message to attract the best talent. So, ignore ESG at your peril.

Whilst regulatory drivers will ultimately change behaviours from the top down, some SMEs are already embracing ESG via qualification for sustainability grants. Indeed, grants may well be a necessary tool to change supply chain thinking. As always, both the stick and the carrot approaches are required to drive change.

To be an early adopter or not to be? That is the marketing question!

Adopt or not? It will become increasingly important to deliver a strong, authentic narrative around sustainability in order to create key points of differentiation in the eyes of the consumer. Whether your company has 5 employees or 150, a top driver will be communication of the firm’s commitment to sustainability and making sure this aligns with the ethos of customers. Everything starts with trust and an overwhelming number of clients are loyal to suppliers that operate with transparency.

Embracing sustainability also signals the right moral and ethical approach – positive impact over profit. It is about walking the talk in all that the whole company does. Every SME has the opportunity to become an industry leader in their clients’ eyes.ESG can best be exemplified through the 3 Rs; showcase your commitment to ‘Responsible’ practices to build reputation, benchmark ‘Resilience’ to external shocks for long term sustainability, and ‘Recruitment’ by being a magnet employer. Research suggests that businesses with a positive purpose are 2.8 times more likely to retain the best staff. Workplace culture has a huge role to play here!

Just like your company values, ESG should be part of everybody’s story. Marketing in that sense has stepped into the educator’s role, marketing with purpose to show how your company’s values align with specific ESG goals.

Robust accounting

The union of governance and standard is sure to gather pace, as will the search for a truly common system of measurement. Describing your sustainability policies, having a good understanding of business risk linked to ESG and celebrating the positive impact your business is having on the environment must now be at the forefront of your mind. Robust ESG accounting will be critical.

The Government is anchored to a target of reaching net zero by 2050 and research suggests that most FTSE 100 businesses are aligned to this. As such, more and more public reporting is inevitable. The base line is rising fast and a lack of accessible data will not be a reasonable excuse for much longer. A forensic approach to keep things on track will be required; this is where your accounting partner can add real value, starting with a forward-thinking approach to just how this is going to impact your business.

This is not a passing trend, it will require a transformative business plan, shared endeavours and a new era of collaboration. Dafferns Business Advisory is poised to help.

From awareness to action

ESG is not all about Net Zero but achieving a thriving and sustainable future. Rather than an immediate quest for Net Zero, climate positive may well be the next big thing.

ESG’s purpose lies in an organisation’s ability to transcend mere compliance and actively drive meaningful change. Embracing ESG initiatives will benefit all stakeholders and, in doing so, will benefit the company’s bottom line too.

As professionals we are always looking to get ahead and be able to speak from a position of knowledge; as Martin Gibbs highlights, we want to be leading our clients through the fog of ESG regulations to set a clear path on their ESG journeys. This could be anything from a casual chat over coffee to a challenging ‘Now-Where-How’ meeting, but most importantly, let’s get the debate started.

Author: Brian Jukes – Head of Corporate and International Tax at Dafferns.

Brian is passionate about ESG, green energy, the interaction with entrepreneurial tax planning and helping clients navigate their way to a net zero future.

Related AGN Global Business Voice publications:

ESG – Reducing Risks and Identifying Opportunities
Clients & Climate Change – Threat and Opportunity?