Why you cannot ignore ESG as an SME
by Anneleen Wydooghe and Jenny Mae Vansteenlandt
ESG (Environmental, Social and Governance) is a term that has become increasingly popular in recent years and is often used as a synonym for sustainability. It provides a framework for assessing what a company actually does in terms of environmental, social and governance issues. The verb 'do' is very important here. It is not enough to have a sustainability policy, procedures and targets. ESG also involves concrete actions and measurable results that have a positive impact on the formulated objectives.
Sustainability: Refers to the ability to meet the needs of the present without compromising the ability of future generations to meet their own needs.
ESG: Encompasses what a company does in terms of environmental, social, and governance aspects and how the company is assessed in these areas.
To assess ESG and other criteria, large companies will be required to report on their corporate social responsibility efforts and performance from 2026. This has been set out in the CSRD or Corporate Sustainability Reporting Directive.
SMEs also fall (indirectly) within the scope of CSRD legislation
Although at first glance the CSRD legislation may seem to focus only on large companies, nothing could be further from the truth. Organizations that fall outside the obligation are indirectly included in the transition to transparency in sustainability.
Large companies have to report according to published reporting requirements, called the European Sustainability Reporting Standards (ESRS). These only require reporting on material topics [1]. These topics must be identified using a dual materiality analysis that considers two pillars.
Impact materiality refers to a company's impact on people and the environment. For example: CO₂ emissions from a production process, waste, pollution, etc.
Financial materiality relates to the financial risks and opportunities for the company arising from external factors. For example: changing and stricter regulations, new technological developments in the market, etc.
However, according to the CSRD, when identifying material topics, companies should consider the value chain as well as the stakeholders in the value chain. This is because risks and opportunities may arise with suppliers, customers and transporters, among others. This could lead to SMEs being approached for stakeholder surveys. Consider online surveys where respondents are asked to indicate how important a particular sustainability issue is for the executing company.
[1] In sustainability reporting, 'material' refers to sustainability topics that are significant. These are the issues that are most relevant to understanding the organisation's environmental and social impact and that may affect its position, performance or development. Material topics help focus reporting efforts on the areas that matter most to stakeholders, such as investors and customers, as well as to the organisation itself.
Easier access to capital
The Sustainable Finance Disclosure Regulation (SFDR) is the counterpart of the CSRD for financial institutions (banks, insurance companies, etc.) that also have to report sustainability information. Specifically, they must report on how sustainability is integrated into their decision-making and on the negative impacts of their financial products on people and the environment. They also have to report on what exactly they invest in. Do these investments pose sustainability risks or do they promote sustainability? Companies, including SMEs, that focus on ESG issues may find it easier to access capital.
The benefits of ESG implementation in your business
Risk management
By incorporating ESG factors into your business strategy, you can identify and manage a wider range of risks. This can result in reducing future financial losses, for example, due to environmental damage or reputational damage.
Cost savings
A focus on environmentally friendly practices can lead to more efficient use of resources and energy, resulting in long-term cost savings for your business.
Access to capital
More and more financial institutions take into account certain ESG criteria when investing and allocating their capital (as they also have to report this under SFDR). Companies, including SMEs, that demonstrate compliance with certain ESG requirements may find it easier to access funding or capital.
Market demand
Customers are becoming more environmentally aware and critical, and therefore place more value on companies that are committed to ESG. This can be a strong competitive advantage for your SME. In addition, employees and job applicants are becoming increasingly critical of the sustainability policies of their current and future employers.
Reputation
When ESG is an integral part of your business strategy and results in measurable actions and outcomes, this will contribute to a positive reputation. It also avoids damage to your brand image, for example, due to environmental scandals.
By integrating ESG into your business operations, you not only meet the expectations of customers, investors, and employees but can also focus on sustainable long-term growth.
Need help implementing or reporting on your sustainability initiatives? Feel free to contact us using the form below!
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Anneleen Wydooghe
Team Manager Sustainability anneleen.wydooghe@vdl.be
Jenny Mae Vansteenlandt
Advisor Sustainability JennyMae.Vansteenlandt@vdl.be
Disclaimer
In our opinions, we rely on current legislation, interpretations and legal doctrine. This does not prevent the administration from disputing them or from changing existing interpretations.
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