To what extent is ESG part of your SME’s compliance obligations? 

As a small business, you have a lot of plates to spin. When it comes to compliance you have to think about: data protection, HR policies, contracts with suppliers.

Are your ESG obligations really that important?

Or can you put it on the back-burner while you focus on other tasks?

The current regulatory position

The short answer is that there is no current regulation that is mandatory for SMEs.

The main UK legislation that regulates the approach to environmental, societal and governance obligations include:

  • Climate Change Act 2008;
  • UK Stewardship Code 2020;
  • Disclosure Guidance and Transparency Rules;
  • Modern Slavery Act 2015
  • Companies Act 2006; and
  • UK Corporate Governance Code 2018

However, these laws typically apply to larger companies of a certain size and turnover. The thresholds are beyond those of most SMEs.

For example, the Modern Slavery Act 2015 requires companies with a turnover of more than £36 million to report on the steps they take to prevent modern slavery. Employers with more than 250 employees must report on their gender pay gap. Listed companies must report on their global energy use and greenhouse gas emissions.

But does that mean that you can forget about ESG compliance? Unsurprisingly, our answer is ‘no’.

Consider your role in the supply chain

The biggest compliance issue for SMEs at the moment is within their role in the supply chain of larger organisations. Big organisations are currently required to report on their Scope 3 emissions.

That means they have to provide information on the emissions for which they are indirectly responsible, including those from its suppliers.

In order to do that accurately, large corporations are increasingly asking SMEs to complete an ESG risk assessment. There is pressure on smaller suppliers to minimise their impact on the environment and comply with social and governance expectations.

The law: future regulation

While legal compliance is restricted to the larger companies at the moment, the raft of ESG-related legislation is indicative of a trend.

It’s becoming ‘the way we do things’ and all businesses will be expected to comply with good practices for ESG. It starts with the big organisations in order to build momentum, and then it will trickle down to every business regardless of size.

We expect to see regulation apply more widely to smaller businesses in the coming years.

Commercial reasons for compliance

While there may be no legal ‘stick’ to enforce compliance from SMEs at this stage, there are plenty of commercial reasons why it’s a good idea.

Here are a few:

  • Access to finance: Lenders now scrutinise a business’s sustainability efforts when they make their decisions on lending.
  • Competitive advantage: Investors and customers increasingly look for businesses which reduce their impact on the environment.
  • Public tenders: Tendering processes for lucrative contracts, particularly in the public sphere, may seek a level of ESG compliance as a pre-requisite.
  • Attract top talent: prospective employees increasingly want to work for purpose-led organisations who care about their impact on the environment and the community.
  • Feel-good factor: Compliance puts in place checks and balances that reassure you that your business is ‘doing the right thing’.

If you’d like any help with your ESG compliance, please get in touch. We can help you with an audit of your current processes and advice for how to comply.

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