We all have to do our bit to save the environment, and life on the planet, by creating more sustainable businesses!
This is the current message emanating to the public and private sector. However, running a SME business is an incredibly time-consuming task for any owner manager. Focussing on sustainability and environmental impact can be just one of a long list of priorities.
Transitioning to more sustainable activities may appear to many an entrepreneur as a daunting task if not already embedded in the ethos of the business. The question then is how to effect a sustainable transition?
Thankfully many resources exist to help get you going.
Why shift to a more sustainable business model?
SMEs are seen as key to the transition to more sustainable economies. Increasingly businesses face pressure to adopt best practices in the fight against climate change. Your workforce and potential candidates are likely to want to know that the business is doing its bit for the environment.
By integrating sustainability into your business model, you can:
- Understand and manage where your business is contributing positively and negatively to the environment
- Develop and improve your brand and reputation with green credentials for all to see
It is also critical for SMEs and their accountants to prepare for sustainability requests that small businesses will face. Sustainability is increasingly becoming ingrained in tendering processes, supplier contracts, and for key stakeholders.
These requests can also come from banks and investors. Regulatory requirements around providing sustainability information and supply chain due diligence aren't yet mandatory for SMEs. However, the conversation grows by the day meaning these conditions could become regulation in time.
What is an ESG audit?
An Environmental, Social, and Governance (ESG) audit is an examination of an organisation's ESG risks and the profiles attached to them. It is performed against a set criteria, or standards, and these form the focus of the audit.
Increasingly, organisations have recognised that they have a key role in conducting their affairs in a manner that is less harmful and more protective of the environment and its stakeholders. An audit of this nature can help you investigate your green credentials, identify gaps, and understand what needs to be done to improve.
The aim is to reduce any damaging impact your business may be having on its stakeholders, which extends to the natural world. An auditor can analyse your organisation's operations and what they are likely to be doing to the environment and the people you work with, providing you with a risk assessment that will help prioritise your business transition to a more sustainable model.
Why carry out an ESG audit?
Getting your business sustainability plan up and running now will ensure you stay relevant to changing demands. In a nutshell, it’s the starting point to future proofing your business.
Specific benefits include:
- Getting ahead of environmental legislation
- Reducing negative impacts on the climate
- Can create efficiencies (time and cost) in how you conduct your business
- Kickstarts implementing green initiatives, improving relations with customers, suppliers, and staff
- Helps establish new controls, in the form of an environmental management system, to help you monitor how sustainable your organisation is
- Collates sustainability information to guide your decision making and reporting to external stakeholders
What is involved in an ESG audit?
Planning
A decision is made on which areas are going to be examined. Resources have to be made available to make this feasible while ensuring it doesn't overly interfere, or conflict with usual business operations. Key questions to ask would be:
- What are the key objectives of the review?
- Why is it important to us and our stakeholders?
- How does it tie to the overarching business strategy?
- What values underpin the decisions we will go on to make?
- What data is already available to assist the review?
- What relevant sector specific regulatory, or voluntary, initiatives exist?
Mapping this out to begin with will form the foundation of your sustainability efforts in the future.
Knowing where you’re going
The next step is to establish a process to use to prioritise the business’s sustainability focus. There are various models and tools available to help do so, such as B Lab’s free impact assessment tool.
Regardless of the model used, the method is rooted in the following actions:
- Identifying the drivers that contribute towards your ESG credentials.
- Grading each driver against three risk categories: inherent, financial and control.
Drivers can be split into the three ESG headlines and may include the following:
Environmental – water and energy usage, raw materials and dependency on non-renewables
Social – modern slavery actions and policies, working conditions (flexible arrangements, living wage policies, and communication channels) and cybersecurity procedures
Governance – management structure and style, succession planning and younger people initiatives, supplier selection
Carrying out the grading
This will include questioning relevant members of your staff and perhaps even working with specialists, to properly understand and evaluate the risks. Most of this work will be conducted when relevant personnel are doing their work in the areas being reviewed.
An auditor will note their observations, particularly where issues are identified and corrective actions need to be taken.
The implementation report
Once the critical issues have been identified, the auditor works with the business to:
- Identify objectives for improvement
- Establish the relevant measurement criteria
- Set-up the monitoring process
This ensures there is a considered and robust process to gathering information relevant for decision and, when the time comes, reporting on improvements.
The journey to sustainability is a process and not an event. Starting is often the hardest part of any fundamental business change.
By Ross Andrews ACA, Partner - Wellers
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