December 7

Can SMEs succeed with wider ESG impact?

Axel Kravatzky

Studies have shown that Small and Medium Enterprises (SMEs) do succeed if they consider their broader impacts, particularly their environmental and social impacts. In this column we examine how the currently ubiquitous term ‘ESG’ came about and how it relates to SMEs. In part 2 we explore the potential that an ESG approach holds for the fashion industry in the Caribbean.

Two publications are credited for launching the term ESG (Environmental, Social, Governance) into the public awareness: the first was entitled “Who Cares Wins”, in 2004 under the auspices of the UN Global Compact. Former Secretary General Kofi Annan had invited 50 CEOs of major financial institutions to find ways of integrating ESG dimensions with financial markets. A year later, in 2005, a second important report by the UN was published, this time a collaboration by the UNEP Finance Initiative together with the law firm Freshfields Bruckhaus Deringer. It was entitled “A legal framework for the integration of environmental, social, and governance issues into institutional investment”.

The first report recommended that all financial market actors should integrate ESG factors into their financial analyses because that would lead to better investment markets as well as to the sustainable development of the planet. The second report examined the question whether the inclusion of ESG dimensions into investment policy ( asset allocation, portfolio construction, and stock picking or bond picking) was to be voluntarily permitted, legally required; or whether law and regulation might be a hindrance.  The report concluded that since the link between ESG factors and the focus of conventional investment value analysis, specifically financial performance, is increasingly recognized, and that financial performance could be more reliably predicted when ESG factors are included in the analysis, “it is clearly permissible and is arguably required in all jurisdictions” (that were included in the analysis for the report).

These reports were the foundation upon which the Principles of Responsible Investment (PRI) were launched in 2006 and the Sustainable Stock Exchanges Initiative (SSEI) was launched in 2007. In 2014 I supported the introduction of the stock exchanges of Barbados, Jamaica, and Trinidad & Tobago to the SSEI, and the Jamaican Stock Exchange became one of SSEI’s growing list of 110 partner members. The total number of signatories to the PRI and size assets under management (AUM) continues to grow at an increasing rate.

Source: PRI Annual Report 2020 – Assets under management and signatories

What about SMEs?

The original intention of those who introduced the term ESG into the public discourse focused on leveraging the power of large financial institutions and institutional investors towards UN’s definition of and goals for sustainable development.  The aim was to have institutional investors include ESG dimensions in their analysis. Companies that the institutional investors invest in would then be required to report on ESG dimensions.

This means that a first link exists for companies into which responsible investors would like to invest. Both the Jamaica and Trinidad & Tobago Stock Exchanges have junior or Small and Medium Enterprise (SME) segments that they are actively promoting and there are a lot of funds that seek to invest in companies that perform well on ESG dimensions.

There are two more links – both of which make stronger connections between ESG and SMEs in the case of the Caribbean.

The second link comes from other forms of capital raising by companies – specifically international development finance institutions, private equity, venture capital, and banking. All three forms are very well resourced in the Caribbean and there is a lot of available capital for firms that can demonstrate strong ESG performance. In the case of banking, we are still at the beginning with the Trinidad & Tobago headquartered  Republic Bank Holdings Ltd as the first and only CARICOM based bank to have signed the UNEP/FI Principles of Responsible Banking.

The third link has the widest applicability for SMEs and holds the real key for success for all others as well: ESG driven sustainability impact as a competitive and collaborative differentiation strategy. There is a lot of hyperbole, hype and hot air in the ESG discourse. Study after study purports to show that companies that perform well on ESG dimensions, outperform their peers in financial returns as well.  More rigorous studies show that this is not quite true for all – but their conclusions are critical to understand and apply because they do lead to sustained and sustainable success!

SMEs in the fashion industry

SMEs globally account for a very large proportion of the value that is being created, employment, but also waste that is generated. Next week, in part 2 of this article, I will look at the case of the Fashion Industry in the Caribbean to illustrate key points for SMEs to successfully and strategically improve their ESGs practices so as to realize their potential. According to research we have conducted on the Fashion industry in the Caribbean five years ago, this is a sector in which the total number of persons employed has decreased significantly throughout the Caribbean, but one that holds great potential and, like in many other sectors, the global drive to put the world on a more sustainable footing is creating important new opportunities for those firms that master the ESG practices appropriate for them.  

This article is part of the "Purpose with Profit" Column and an earlier version was published in the business section of the Newsday (Trinidad & Tobago), Business Authority (Barbados). (Jamaica), and The Voice Newspaper (Saint Lucia) in November 2021.

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