SMMEs in South Africa can no longer ignore ESG shift if they want to survive

23 November 2021

Many small and medium sized entities (SMMEs) have long been able to operate under the ESG (Environmental, Social and Governance) radar primarily due lack of resources. As a result, they have been slow to put sustainability at the core of their operations.

In light of the growing shift of capital and societal demands towards ESG principles, SMMEs can no longer ignore the changing world. If they don’t make small steps towards greater sustainability, they could find themselves struggling to attract the best staff, maintain strong supplier relationships, raise finance and maintain a strong brand.

Through larger resources, larger corporates may have an easier path to reach globally accepted sustainability goals - achieving good governance structures and carrying out responsible business practices within the immediate communities they operate in - be it for their staff, local community or users of their products.

Listed and larger unlisted companies can afford diversified boards and independent remuneration committees. They can measure, verify and report on waste management, water efficiency, emissions and other ESG characteristics.

But for a small to medium company as well as those in the unlisted space, the ESG journey has many roadblocks.

These companies are often owned by a combination of founders, private equity firms, family offices and management. Smaller unlisted companies cannot necessarily afford large independent boards, independent remuneration committees and audit committees.

They often do not have to comply with all the typical regulatory requirements of a larger listed company or follow King IV corporate governance standards to the letter.

Additionally, when it comes to governance, non-executive directors are typically shareholder representatives who cannot be seen as truly independent given the material shareholdings in the business.

Research on and the adaptation to sustainable products is often too costly for smaller companies. They are hindered by speed of growth, difficult to interpret data as well as resources.

But if capital continues pursuing larger, listed organisations, we will continue to see less support for the unlisted and smaller corporates. These companies will have to recognise ESG and embrace sustainable practices if they want to grow in the shifting economic landscape.

In South Africa, where SMMEs are the major creators of jobs, this is particularly important. The National Development Plan envisions that 90% of all new jobs in South Africa will be created through SMEs by 2030 meaning they are a major economic driver.

The good news is that they don’t have to replicate the larger company structures and ESG application methodologies. There are simple but profound steps they can take to begin the ESG journey.

What is most important is that they need to make a start with cost effective strategies that have a big impact.

How to make smaller companies more competitive

Many important areas of business are easily measurable: board composition, diversity, ethics policies, carbon intensity, energy efficiency, waste management, customer complaints, employee wellbeing and community engagement. Small, medium and micro enterprises do not have to measure and report on all of these metrics but rather focus on the key factors that are material to their core operations.

If measured, all corporates can produce targets, benchmarks and track progress against these ESG metrics. These can be reported publicly on their website or social media. It may even help reduce staff turnover as increasing numbers of workers seek out the feel-good factor of being employed by a forward thinking sustainable company.

Another step towards further transparency can be achieved in the form of policies or values statements that communicate intent and the goals of the business.

This should appeal to potential investors, customers and clients. This greater transparency is a big win for smaller companies and has the potential to dramatically improve branding and perception.

Most significantly, the consideration of ESG factors as part of an overall risk management exercise can be revealing. It can save costs and direct executive resources where they are needed in the business.

Demonstrating how you are contributing and enhancing the community that the business operates in is another way to create goodwill, attract capital and make an impact as a good corporate citizen.

It should also be noted that small and medium sized organisations have at least one advantage as a major creator of jobs in that they can easily measure the societal impact of additional job creation.

In partnership with the National Treasury Jobs Fund, Ashburton Credit Enhanced Funds were developed in this context to unlock private and public sector savings and direct them at the SMMEs directly or via intermediaries.

So far over thirty companies have been directly funded and thousands of SMMEs indirectly funded while creating 17 000 jobs in the past six years.