Medium-sized companies: Is ESG relevant for us at all?

„This only applies to listed or large companies.“

„Regulators and do-gooders make a big fuss about ESG but it plays no role at all in everyday life and in my business.“

You often come across such statements, also in connection with M&A transactions, when entrepreneurs are looking for a succession solution or strategic partners. There can be controversy about the characteristics and meaningfulness of some topics, but the fact is: ESG is here, affects everyone and is here to stay.

And there are convincing reasons to get involved. Obviously, laws and binding regulations, e.g. the “Lieferkettensorgfaltspflichtengesetz” or regulations on sustainability reporting (keyword CSRD = Corporate Sustainability Reporting Directive) for larger and soon also for smaller companies. But the megatrends of climate change and demographic development are the driving forces behind ESG. Those who ignore them are acting at their own peril. The world is changing rapidly and if you don’t act, your business model could be at risk.

Steinbeis M&A Partners GmbH has noted that over 70% of companies enter into an M&A transaction comparatively unprepared from an ESG perspective. It is often overlooked that the necessary preparations must be made long before the actual sale of the company. The integration of ESG objectives and measures into the corporate strategy and day-to-day business reduces risks and opens up opportunities, e.g. to find the right buyer or to increase the company value and selling price.

What is ESG?

ESG has indeed been on everyone’s lips in recent years. But what is behind the acronym? ESG stands for “Environmental, Social and Governance” and refers to the three key areas in which companies assess their sustainability performance and, increasingly important, are assessed by business partners:

  • Environmental refers to the ecological footprint of a company. This involves topics such as the use of resources, energy efficiency, emissions and the handling of waste.
  • Social refers to a company’s social responsibility towards its employees and society. This includes topics such as working conditions, diversity and inclusion, health and safety in the workplace and social projects.
  • Governance deals with the way in which a company is managed. This concerns the integrity of business practices, transparency, the quality of management and compliance with ethical standards.

Megatrends and regulation as drivers of development

But why should medium-sized companies be interested in ESG at all? After all, you might think that this topic is only relevant to large corporations and is more of a fad or ideology. The idea that ESG is just a passing trend can be tempting. But the reality is that ESG is a topic that needs to be addressed if you want to continue to be successful.

There are many reasons for this, but the megatrends of climate change and demographic development in particular play a decisive role. Climate change requires a more sustainable economy in order to minimize the environmental impact. At the same time, the ageing population will exacerbate existing problems such as the shortage of skilled workers and personnel and create new social challenges that companies will have to solve.

The ever-increasing pace at which regulation is being driven forward worldwide by various organizations (United Nations, European Union, standard setters such as GRI and ISSB) is accelerating the process of putting ESG on the agenda. Just one example: the “Lieferkettensorgfaltspflichtengesetz” initially only affects larger companies with more than 3,000 employees (>1,000 employees from January 1, 2024). However, they require their suppliers, including the local baker who wants to supply the canteen, to comply with certain standards.

Outstanding importance for companies

But the real drivers for ESG are the pressing global challenges and the changing expectations and demands of customers, employees, financing banks and investors that an entrepreneur is considering as a buyer of their company or another succession solution. Companies that ignore these changes and do not tackle them proactively risk losing touch, destroying value and, in the worst case, destroying their business models.

Specifically, the expectations and demands of various stakeholders have already changed significantly and this development will continue to accelerate:

Customers: More and more consumers are attaching importance to sustainable products and services. Business customers are optimizing their supply chains accordingly. Companies that ignore ESG principles can lose customers or be squeezed out by the competition.

Employees: The “war for talent” in the recruitment of employees and the general shortage of personnel and skilled workers are omnipresent. It is not only skilled workers who are increasingly looking for employers who are socially and ecologically committed. Among the younger generation, many young professionals attach great importance to identifying with the employer’s mission and values. Companies that neglect sustainability and ESG will have difficulties attracting and retaining talented employees.

Banks: Financial institutions are increasingly concerned about supporting sustainable companies. They could either charge higher interest rates or even refuse financing and terminate a business relationship if ESG risks are not adequately addressed.

Investors: Investors see ESG aspects not only as a moral obligation, but also as financial risks. They could reduce their company valuation and purchase price offers or completely avoid companies with poor ESG performance and high risks.

Threats and risks, but also opportunities

ESG undoubtedly harbors threats and risks for companies. At the same time, however, it also opens up a wide range of opportunities. Companies that integrate ESG into their business strategy and communicate this effectively can benefit from an improved reputation, increased sales opportunities, cost savings, increased efficiency and greater attractiveness for employees.

What should a medium-sized business do?

The challenge for mid-sized companies is to integrate ESG into their business practices. Here are some steps you should consider:

  1. Self-assessment: Identify which ESG issues are particularly relevant for your company. Every industry and every company faces specific ESG challenges.
  2. External support: In many cases, it makes sense to bring in external experts to provide a sound external perspective and help with ESG strategy development and implementation.
  3. Risk reduction and opportunity exploitation: Develop strategies to minimize ESG risks and exploit opportunities. This can include, for example, measures to reduce CO2 emissions, improve working conditions or introduce appropriate governance practices.
  4. Take action: Implement concrete steps to achieve your ESG goals. This can include training for employees, the development of ESG reporting or ESG certifications.

If you need help with the implementation of your ESG strategy, you can count on experts from the Steinbeis organization. If you are planning a company sale or a debt financing project, for whose success the optimization of ESG issues is essential, the consultants of Steinbeis M&A Partners GmbH will support you. The ESG experts at Steinbeis Augsburg Business School are often involved in this process, offering comprehensive advice on all ESG issues independently of a corporate transaction: ESG Quick Check to support companies in their self-assessment, advice on developing and implementing an ESG strategy, training for employees and ESG certifications. This allows you to ensure that your company is on the right track.

Overall, it is clear that ESG is by no means just a fashionable topic or an ideology for SMEs. The economic impact and consequences are real and can be decisive for the long-term success of a company. The time for ignoring ESG is over – it is time to take action and seize the opportunities that arise.

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