Majority of UK SMEs 'don't understand' ESG

22 March 2023 Consultancy.uk 4 min. read
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Less than one-third of leaders at small and medium-sized firms understand what ESG is. The finding comes from a new study, which also found that fewer than one-in-four firms were implementing ESG initiatives at present.

As the impacts of climate change continue to ramp up, UN scientists have warned that the planet is “nearing the point of no return” – in which it risks passing the internationally agreed limit of 1.5C of global warming since pre-industrial times. Since the signing of the Paris Climate Agreement, many of the targets necessary to avoid this scenario, and its dire implications, have hinged on market-based solutions.

Businesses have largely been left to set their own goals leading to 2050. This has proven a problem, as while many of the world’s largest companies have presented as being very enthusiastic about their ‘race to net zero’, a growing number of studies have shown that they are not accurately measuring their emissions in a way that ensures meaningful progress.

Are SMEs applying any ESG measures?

Outside the top table of global businesses, things are not much better. A new study from Capterra UK suggests that just 30% of small and medium-sized enterprises (SMEs) fully understand what environmental, social and governance (ESG) policies – a set of standards for a company's behaviour used by socially conscious investors to screen potential investments – are. This not only has problematic implications for the environment, but also suggests other firms may be setting themselves up to miss out on investment.

Capterra conducted an online survey in December 2022 of around 300 UK business owners and managers from a variety of industries. When the firm asked that sample if they understood what ‘ESG’ was, around 34% said they did not know the concept, or what the letters stood for. Meanwhile, 36% claimed to have familiarity with the concept, but admitted to not knowing what the letters ‘ESG’ meant – suggesting that to some extent, they may have been bluffing about actually knowing.

With so few SMEs possessing an adequate understanding of ESG policy, it followed that only 39% had previously seen fit to actually put an ESG initiative into action at their firm. While 52% were “interested in starting to apply” such initiatives, their lack of previous action does not bode well for the UK’s national push for net zero – which has already been publicly acknowledged as being behind schedule on its transition targets.

Why have interested SMEs not deployed environmental and social governance.

According to the UK government, SMEs account for 99.9% of the business population. At the start of 2022: there were estimated to be 5.5 million UK private sector businesses. With so little of that market currently undertaking ESG changes, the possibility of tackling climate change via market solutions is looking increasingly remote.

Of the 52% of respondents who were interested in implementing ESG, but had not, the largest number felt they did not have enough information on how to take action. According to Capterra, if they are to mitigate the risks placed on slow reactions to ESG demand, and attract potential investment, they need to weigh up external support – through the state, from expert consultants, or from technology.

Capterra UK Content Analyst, Eduardo Garcia Rodriguez, commented, “With the threat of resource scarcity and supply chain disruptions due to climate change, SMEs need to be reactive and prepared to mitigate these and any possible future risks. Requesting government funding is one route, but businesses should also seek to implement their own solutions to be prepared. Software is a viable aid as it can provide real-time data on inventory management, supply chain monitoring and sustainability tracking. By leveraging technology, SMEs can proactively address climate-related challenges and help ensure long-term resilience to their business.”