How Do SME Tech Organisations Deal with ESG Requirements Imposed by Large Multinational Companies?

With the increasing significance of ESG in business, small and medium-sized enterprises (SMEs) in the tech sector face pressure to navigate this complex area and implement effective strategies to comply with their responsibilities.

SMEs often have limited resources compared to larger, more established businesses. This means the integration of sustainability into their daily business practice can be a challenge, as they also need to ensure they focus on remaining profitable.

However, there are various strategies SME tech companies can employ to meet ESG requirements, from developing eco-friendly products to enhancing governance transparency. SMEs play a vital role in driving sustainable practices within the tech industry and beyond, so effective strategies must be implemented to allow them to implement ESG whilst continuing to thrive as a business.

What is ESG?

ESG stands for environmental, social, and governance. It relates to requirements that measure a business’s contribution to the three stated areas. It is a globally adopted principle that seeks to hold businesses accountable for their impact on society.

The environmental aspect is focused on businesses reducing their impact on the environment. Strategies can be implemented in any business area; for many SMEs, this may be as simple as switching to recycling.

The social aspect is focused on a business’s impact on society, including the workplace culture. ESG efforts could include anything from providing equal opportunities within the business to investing in helping local communities.

The governance aspect focuses on a business’s systems and procedures governing decision-making, transparency in reporting, and the operational mechanisms for running the business. It aims to promote accountability, ethical conduct, and compliance with regulations.

Is ESG mandatory for SMEs?

SMEs not officially listed on the stock exchange are not obligated to report on their ESG impact. However, the implementation of ESG practices are becoming increasingly crucial for stakeholders and consumers, and such requirements can still be imposed by those parties who either have an interest in the business or in receipt of its goods and services.

Challenges of ESG for SMEs

SMEs are at a disadvantage when it comes to implementing ESG, as often they do not have the financial backing, nor the expertise and data to allow them to introduce the relevant practices readily. The time and money invested in ESG also need to be carefully balanced against the resources being put towards the day-to-day running of the business to ensure it can still succeed. ESG is also a broad concept encapsulating various issues and measures, so addressing this can feel like a minefield for smaller enterprises.

While it may not be as easy for SMEs to integrate ESG into the workings of their businesses, effort should still be made to put this into effect. The impact of a company’s ESG efforts is unlikely to match those of their multinational counterparts. However, even minor adjustments can significantly improve a small to medium business from an ESG perspective. The key is to develop a clear strategy suitable for the business.

How can SMEs in the tech industry effectively implement ESG?

Tech SMEs can effectively address their ESG responsibilities by establishing clear goals and assessing how these goals can be achieved, considering their more limited resources.

Having a dedicated person or team within the business who can manage and report on ESG will allow any strategies to be correctly put into place while the business can continue to run smoothly. Businesses in this industry are already in a good position, as they can benefit from the technological systems they already have in place to help streamline ESG development and implementation. They can develop an effective strategy by doing the following:

Identify the practices they already have in place

Tech SMEs can start by breaking up the ESG principles and assessing their contribution to each aspect. If a business does not understand what efforts are already being made, it won’t be able to determine where there is room for improvement. For example:

  • Environmental: smaller businesses in the tech industry tend to be more environmentally friendly than those in other industries. The business will likely already have policies to reduce its waste and carbon emissions, such as being paper-free and using LED lighting on its premises.
  • Social: tech businesses will almost certainly have systems in place to protect their consumer data and will supply training to their employees on essential matters such as GDPR.
  • Governance: the business is likely to have policies in place regarding ethical business practices, to tackle issues such as money-laundering and bribery.
Use an external expert

Seeking the input of an external expert can be a more cost-effective way for a business to understand what more it can do regarding ESG. A consultant’s services and expertise can be utilised on an ad-hoc basis instead of developing an entirely separate team within the company to manage this. In the context of the tech industry, they can recommend ways in which ESG contributions can be readily integrated into the business’s existing operations.

Not only will an expert be able to suggest how the business can improve its ESG contributions, but they can also be brought in to educate employees on the adopted strategies, and how everyone can help implement them.

While this will involve an up-front cost that may be off-putting to some SMEs, businesses should see this as a benefit likely to pay off in the long term.

Establish a goal

Before implementing various new ESG strategies, businesses should be realistic about what they can achieve. Ideally, goals should be easily measured so the company can monitor progress. Companies should decide on a timeframe for achieving their goals and conduct regular reviews to see if any improvements can be made concerning their processes.

Establish new ESG measures

Whether with the help of an external expert or through internal discussions, tech SMEs should clearly establish what more they can do in terms of ESG. They should work out how much they can invest in ESG without negatively impacting their financial growth and stability.

The specific measures will depend on the business’s ability to put them into effect, but some examples that tech SMEs could easily introduce are:

  • Environmental: investing in energy-efficient equipment, renting eco-friendly office spaces, and implementing remote work to reduce the business’s carbon footprint.
  • Social: adopting diversity and inclusivity policies within the workplace, supporting local community initiatives, and ensuring fair labour practices are implemented at every stage of the chain.
  • Governance: having systems in place to ensure accurate reporting on the business’s finances and operations, introducing policies that hold senior management to account in respect of the business performance, and being open with employees about salaries across all levels of the company.
Implement and integrate

Once the ESG measures have been identified, they must be effectively implemented. Again, an external expert can assist with this, but there are other things tech companies can do to incorporate these new practices into the business.

ESGs should be seen as a collaborative effort. SMEs can encourage their workforce to engage with ESG measures by involving employees in discussions for improvement and inviting new ideas. Training should be provided on the importance of ESG and the business’s wider impact on environmental, social, and governance issues. Smaller businesses may shy away from this as training will cut into usual work times and cost money. However, the long-lasting impact on the business in terms of its ESG contributions will be significant.

SMEs can also outsource their training to external institutions and even use various free online resources to bolster their training. One institution that provides this is The Open University.

Showing off ESG strategies

Tech SMEs can improve accountability and make their business more attractive by speaking publicly about ESG, and the measures they have adopted to support this. These days, potential investors and customers place a lot of importance on a company’s sustainability and ethical practices, so having this information readily available can substantially benefit the business’s reputation. This could include sending a regular newsletter explaining how the business stays on top of its ESG obligations.

Additionally, SMEs can apply for certifications or initiatives, such as the B Corp scheme. This will encourage ESG policies internally and allow tech SMEs to advertise their efforts.

Conclusion

The navigation of ESG for smaller tech businesses can seem daunting, but tech SMEs are well-primed to establish and implement any number of effective strategies proactively. Recognising what is achievable is vital, and seeking expert advice on how the business’s contributions can improve is strongly recommended.

 

Find out how TechLaB can help you reach your goals with our business-oriented, fast, innovative, multilingual yet detail oriented legal advice

Contact techlab

type your search

TechLaB – Technology Law Boutique: your one-stop shop for global legal services in technology.