By Samuel Oyugi Oriwo, Erica Atieno & Isaiah Omolo
Introduction
The Green and Digital Innovation Hub (gDIH) is dedicated to advancing sustainability for Micro, Small, and Medium Enterprises (MSMEs) by providing access to cutting-edge technology and resources. This hub serves as a platform for MSMEs to adopt innovative solutions that enhance their Environmental, Social, and Governance (ESG) practices, which are increasingly important for businesses striving to demonstrate good practices, attract customers, and ensure long-term success. ESG principles are integral to sustainability, emphasizing development that meets present needs without compromising the ability of future generations to meet their own needs. By fostering a culture of sustainability and digital transformation, the hub empowers MSMEs to navigate the evolving demands of the global and local markets while contributing to the broader sustainable development goals.
The three pillars of ESG-Environmental, Social, and Governance-are interconnected and must be integrated to collectively guide businesses toward sustainable practices. Focusing solely on one pillar may be limiting, as true sustainability requires a balanced approach across all three areas.
Overview of ESG:
Environmental: This pillar evaluates a company’s impact on the environment, including how efficiently it uses resources, its environmental footprint in terms of emissions and waste, and its actions to mitigate climate risks. By adopting energy-efficient technologies, sustainable sourcing practices, and pollution control measures, MSMEs can significantly reduce their environmental footprint while minimizing operational costs.
Social: The social criteria focus on how a company manages relationships with its stakeholders, including employees, customers, and the broader community. This involves promoting fair wages, safe working conditions, diversity, and inclusion, as well as engaging positively with local communities and ensuring customer satisfaction through ethical practices.
Governance: This pillar assesses the systems and processes that guide a company’s operations, including the composition and diversity of its board of directors, adherence to ethical standards, and the transparency of financial reporting. Strong governance practices ensure accountability and build trust with stakeholders, including investors and customers.
Micro, small, and medium-sized enterprises (MSMEs) adopting ESG practices can experience numerous benefits and face several challenges.
Opportunities for MSMEs adopting the ESG Principles
- Enhanced reputation is one key advantage, as by adopting ESG principles, MSMEs’ can increase their reputation by showcasing their commitments to sustainable and ethical practices, thereby attracting customers and investors.
- ESG practices enable MSMEs to identify and mitigate risks associated with environmental, social, and governance issues, ensuring long-term stability.
- ESG helps companies tap new markets and expand their presence into existing ones.
- Adopting an ESG strategy can further help companies attract and retain talented employees, boost employee motivation by providing a sense of purpose, and enhance overall productivity. Higher employee satisfaction is linked to improved shareholder returns.
- As global commitments to sustainable development and climate change evolve, companies that adopt ESG principles will be better positioned to comply with future regulations, avoiding potential operational disruptions. It is advisable that entities that incorporate ESG practices into their operations to disclose their ESG performance in order to meet stakeholder expectations; maintaining positive relationships with stakeholders and reinforce corporate legitimacy.
Challenges for MSMEs adopting the ESG Principles
- MSMEs may face significant challenges in adopting ESG principles due to limited reporting requirements, higher costs, and lack of capacity, and limited data.
- Obtaining accurate ESG information remains difficult when adapting to reporting procedures, the absence of aligned methodological frameworks for ESG integration, and the complexity of management’s commitment and risk management.
Common reporting frameworks that MSMES can align with to report their ESG performance include: Global Reporting Initiative (GRI) and the Sustainability Accounting Standards Board (SASB). MSMEs need to grasp the opportunities and challenges associated with integrating ESG practices to make well-informed decisions. This requires a comprehensive and proactive assessment of ESG impacts for effective decision-making.
Insights from Recent Training Session on SMMES
During the recent ESG training sessions for MSMEs organized by the Green and Digital Innovation Hub (gDIH) in June 2024, some participants realized they had already been incorporating ESG principles into their operations, albeit informally. The training emphasized the importance of formally recognizing and reporting these practices to enhance transparency and stakeholder engagement.
One participant remarked; “Some of us were already practicing ESG in our businesses without even realizing it, but now, through the training, we understand the importance of reporting these efforts.”
A majority also mentioned the lack of reliable cash-flow as a major drawback to incorporating the ESG principles into their operations.
“I am struggling to raise capital for the daily running of the business, getting excess funds to implement the ESG, is a therefore not a priority at the moment,” stated one of them.
The sessions also highlighted challenges, such as difficulties in accessing information on ESG financing from local banks. Many MSMEs expressed interest in adopting ESG practices incrementally, starting with small, manageable steps.
The Green and Digital Innovation Hub continues to support these businesses by offering resources, training, and guidance to help them effectively integrate ESG principles, thereby advancing sustainability and contributing to broader sustainable development goals. All in all, the training was a great eye opener to the participants and look forward to such more engagements!
References
[1] Alex Edmans, “Does the stock market fully value intangibles? Employee satisfaction and equity prices,” Journal of Financial Economics, September 2011, Volume 101, Number 3, pp. 621–40, sciencedirect.com
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