• SMEs make up 60% of European businesses – they have to invest in sustainability for sake of environment
• ESG investment makes SMEs more resilient, as well as more environmentally friendly
• Increases in ESG performance has direct impact on firm’s credit risk

In recent years, as environmental, social, and corporate governance (ESG) has become ever more important, there has been a steadily increasing expectation from regulators, consumers and investors for organisations to incorporate more sustainable practices into their day-to-day business practice.

It’s becoming all too clear that current action from governments and the public sector is not doing enough to successfully reverse the effects of climate change and reach all 17 SDGs by the 2030 goal. Large multinational corporations need to invest further in ESG initiatives and commitments, and certainly have the resources and funding to do so.

However smaller organisations also have a vital, perhaps more powerful, role to play.

SMEs make up the largest share of businesses across Europe. In fact, a 2016 report revealed there were 5.5 million registered businesses in the UK, but only around 7,000 of these were considered large companies with more than 250 employees, compared to 5.49 million SMEs. This means that, in total, SMEs employed more people than large companies; 15.7m compared to 10.8m, respectively. This suggests that SMEs leave a hefty footprint when it comes to protecting the environment, and yet, very little has been done to encourage or to support them in reducing their impact.

For many of these SMEs, however, simply staying afloat and making a profit is difficult enough, let alone having to spend vital funding on ESG initiatives which may have a positive on the environment, but offer very little pay off in terms of profit. ESG transformation can be expensive and uncertain, especially as results and benefits may not be seen for a long time due to the long-term nature of investing in ESG.

Therefore, to convince SMEs to engage in ESG and sustainable practices, it is important for them to understand not only how ESG practices benefit society, but also how they might benefit their bottom line too. New research from Vlerick Business School, commissioned by ABN AMRO, might go some way into making this possible.

The study, conducted by Professor David Veredas and doctoral researcher Dimitrios Kolokas, shows that investing in ESG initiatives is also a positive for the firm itself, as it boosts their resilience and decreases their credit risk.

The researchers investigated the impact of environmental, social and governance (ESG) performance on the credit risk of 350 SMEs as a measure of resilience. 

The researchers developed a model for SMEs that measures financial and ESG performance. The researchers scored SMEs on their ESG activities based on information taken from their websites and sustainability reports.

The results showed that investing in sustainability pays off, as SMEs become more creditworthy. In fact, on average, an 11% increase in an SME’s ESG performance will decrease its credit risk by 3.5%.

The researchers say that these results can help provide reassurance to SMEs that taking the step to invest in ESG practices will not only serve to benefit society, but will also pay off for them too by boosting company resilience. SMEs, they say, can become more creditworthy when they increase their ESG performance. However, low-resilience, high-risk SMEs do not enjoy the perks of ESG practices, due to their limited access to financial resources which, may boost the temptation to engage in greenwashing rather than committing to any ESG practices which deliver real results. However, the researchers advise SMEs to resist and to think of the bigger picture.

When the necessary financial resources are available, low-resilience SMEs can benefit by experiencing a significant decrease in their credit risk as a result of an increase in their ESG performance, helping spur them onwards and upwards.

It’s clear to see, the researchers says, that that sustainability-driven SMEs are also more resilient to large shocks, making them more creditworthy. Therefore, investing in sustainability is not only good for the planet, but good for profit too.

And perhaps, after all, it is smaller, younger firms which are going to become the most dedicated to delivering real change for the planet. Whilst well-established global brands certainly have their part to play, the greatest chance for sustainable change will come from working together.