The Evolution of CSR Into ESG - What Does it Mean for SMEs?

Published on: 19 August 2022
by Jithin Joshey Kulatharayil
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In this volatile business world, every decision and action an organisation takes may impact the potential for its continued survival in the future. Every aspect of the business must be meticulously analysed from minute details to complicated investment decisions. As the business conditions centred around the pandemic begin to recede, the area of sustainability and the environment is regaining prominence and importance for small to medium-sized enterprises (SMEs). 

The terms ‘sustainability’ and ‘environment’ might appear simple by definition, but deep down, from a business perspective, they often baffle even professionals in the field. What do these two terms mean in terms of how they actually impact business operations, and how have they helped shape what appears to be the same, but differs in many ways—Corporate Social Responsibility (CSR) and Environmental, Social, and Governance (ESG)?

CSR and ESG

CSR comprises a set of standards, policies, and strategies implemented by a company to bolster morale and create a positive impact on society. It helps an organisation value society and the environment in addition to maximising profit. Some common examples are: providing employment opportunities to people in the vicinity of the company, initiating eco-friendly business operations, donating to charity, investing in the education of the underprivileged, etc. Companies adopt CSR to enhance their brand image and corporate public relations, and most importantly, some are really motivated and inclined to do it because of personal conviction. 

On the other hand, ESG is a set of quantifiable and measurable standards, policies, or metrics used by investors to screen potential investment opportunities. It consists of three pillars: environment, social, and governance. Environmental activities include lowering greenhouse gas emissions, publishing sustainability reports, using renewable energy sources, achieving net-zero goals, etc. Social criteria cover significant societal issues that need to be addressed, including providing fair wages to employees, embracing diversity, LGBTQ+ community welfare, etc. Finally, governance is concerned with the company's board of directors. For example, the chair of the committee could be someone other than the CEO, the company could be more open and transparent, etc.

Has CSR Evolved into ESG?

To a great extent, the answer is ‘yes’. As discussed above, the CSR approach is more qualitative, whereas ESG is more quantitative. In this fast-moving world, impact investing has increased the demand to rank companies on their ESG scores or performances—CSR has become more irrelevant owing to this transition. Also, the annual release of CSR reports by companies has led stakeholders to question its real impact on social and environmental issues. This is because many companies have started using CSR as a marketing tool to make claims without solid evidence, which led to ESG taking over CSR.

The world has witnessed a massive shift post-pandemic, where investors, consumers, and other stakeholders have become more environmentally conscious on an unprecedented scale. They often ask companies to come up with ways to measure how their business affects the environment. This demand has even reached a point where companies are likely to lose investors and customers if they don't incorporate ESG issues into their strategies.

SMEs and ESG

Both CSR and ESG are often linked to big companies around the world because of how well-known they are through them. However, small and medium enterprises (SMEs) can also incorporate them into their business operations—they form around 90% of businesses and more than 50% of employment worldwide. So, think about how much of an effect they will have on energy efficiency around the world, especially in emerging economies, if they adopt sustainable strategies as much as they can.

Every organisation, from the smallest to the largest, has to deal with ESG issues in differing proportions. If one firm is challenged by environmental issues, then another may face social, governance, or all combined. Keeping that in mind, sustainability needs to be at the top of the agenda from the beginning of an organisation so it develops, evolves, and becomes future-proof. With such pragmatic advanced planning, your organisation is less affected by future crises, which makes your business more resilient and, consequently, helps build stronger corporate-stakeholder relations. 

These days, financial institutions such as CIMB are facilitating the SME journey towards sustainability and developing several programmes to incentivise ESG uptake. In addition to that, the following points will come in handy:

  • Promote awards and certifications—for instance, the ISO 14001 certification. That will help you reach out to stakeholders and send a strong message about your sustainable ambitions. 

  • Get in touch with NGOs and other community organisations to better understand the needs of people.

  • Finally, showing real gratitude and winning the minds of people will always positively impact your business. An organisation with great commitment will always have a special place for people which, of course, is the hardest brand loyalty to achieve.

A journey towards sustainability might be challenging and tough, but it is also rewarding and worth following. From small to large organisations, the concept of ESG is the same. However, the priorities and agendas may vary. If executed with open consideration from the beginning, then your business will be on the path to stronger ESG-based growth, rather than off it.

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