In this article, Leah Daly, Senior Director of Environmental, Social, Governance, SVP at Santander US, discusses the benefits of ESG adoption for small businesses and provides practical advice for incorporating ESG best practices into your business planning.

ESG—an acronym that stands for environmental, social, and governance—is a business concept that has captured a lot of headlines in recent years. In practice, a company’s ESG efforts demonstrate its commitment to do well by doing good: Natural resource use and sustainability (environmental), fair and safe treatment of employees and customers (social), and leadership, risk management, and company culture (governance) are all ESG-related areas. The relative focus on environment, social, and governance will vary by company.

Much of the current ESG discussion centers on large, publicly traded companies and their initiatives, pledges, and programs. But small businesses in the U.S. drastically outnumber large ones—and their ESG efforts have the potential to make a significant impact.1

“ESG requires a really thorough evaluation of how businesses are serving their customers, employees, suppliers, and communities, which is critical as small and medium enterprises face new challenges including rising costs, greater scrutiny from lenders, and labor market and supply chain volatility,” says Leah Daly, Senior Director, Environmental, Social, Governance, SVP at Santander US. Daly heads up the office that coordinates Santander US’ ESG activities, which include accelerating the development of sustainable products and reducing the environmental impact of Santander’s operations. Supporting communities is one part of how Santander helps people and businesses prosper, and a strong commitment to ESG is at Santander’s core, across the bank’s footprint.

“Small businesses are the backbone of their communities and often closer to their customers than larger enterprises, which gives them advantages,” says Leah Daly. “In many respects, small businesses can be more responsive to changing needs of customers and other stakeholders.” Daly suggests that this puts small business owners in an excellent position to adapt their business practices to their evolving ESG priorities and clearly articulate their values to their customers.

Aligning with stakeholder priorities and values

Daly explains that having a clearly defined company culture centered around the advancement of ESG priorities can help to attract and retain talented employees, build lasting relationships with your customers, and appeal to investors. “The Great Resignation has created a tightening labor market and thinking proactively about your employees— from flexible work programs to diversity, equity, and inclusion (DEI) issues—can be a differentiator.” Being able to articulate a purpose beyond profit and demonstrate a company culture that aligns to an employee’s or customer’s goals helps ensure talented employees seek you out and customers recognize a greater value.

“If I have a choice between a company that is focused on reducing its environmental impact, for example, and one that isn’t, I may be more inclined to provide my business or, in the case of investors, capital, to the one that more directly aligns with my priorities and my values,” says Daly.

Incorporating ESG into Strategy

Putting ESG into practice is a journey that begins with small decisions and some self-reflection. Daly recommends thinking about ESG strategies through a holistic lens—asking questions about what the business does best and getting curious about how to improve. “How does the environment relate to our strategy? How does our impact in the community relate to our strategy? How can we integrate those things a bit more directly?” Beyond any brand benefits to “going green,” Daly notes that “small businesses can often achieve significant cost savings through little changes like migrating to digital receipts or targeted efforts to reduce energy consumption.” In this way, enhancing your ESG strategy has many benefits.

Addressing risks & thinking about impact

ESG is what Daly calls an “integrative discipline”—one that requires small businesses to “look across their landscape and understand not only what their impact may be in terms of the environment or social issues, but what risks may be associated with those things.” Daly suggests that by doing this, businesses can conduct a more thorough analysis and gain a deeper understanding of the entire risk landscape and better protect enterprise value. “A large amount of company value can be off balance sheet as are the risks,” says Daly. In this way, failing to address ESG topics ranging from climate risk to diversity can negatively impact enterprise value whereas a focus on risk management can attract investors and increase savings in areas like insurance coverage.

There are many kinds of ESG decisions that business owners can make. What they look like varies drastically depending on your business, but here are a few examples:

Environmental: Looking at the climate risk associated with operating a business might lead a small business owner to identify their vulnerability to adverse weather events or to uncover spikes in energy consumption related to the manufacturing of its products. In her own life, Daly encountered a local dry-cleaning company that took a closer look at the chemicals it used and the effects that they had on the environment, employees, and customers. This led this business to make wholesale changes to the products and processes they used in their day-to-day operations. In doing so, this company made clear progress towards reducing its footprint and connecting with customers who value environmental responsibility.

Social: Since a company’s diversity, equity, and inclusion (DEI) initiatives are part of its social impact, any small business that makes a coordinated effort to source minority- or women-owned suppliers or partners, or to actively hire workers from underrepresented backgrounds, is taking steps towards fulfilling the social piece of ESG. Workplace safety is also a key component of a business’s social impact; a small construction company that regularly assesses its labor practices and invests in safer equipment for its workers is an example of ESG at work.

Governance: Daly suggests that businesses of any size can consider how their leadership is structured and compensated, how they communicate their strategy, or how strong their quality controls are—all of these topics lead to stronger governance.

Taking the first step by putting a focus on purpose

Ultimately, ESG efforts benefit not only your business, but your end consumer. By embracing ESG initiatives, companies have an opportunity to reduce risk, cost, and environmental impact, while increasing employee and customer loyalty.

For many businesses, understanding and articulating their purpose is the first step to effectively implementing an ESG strategy. From there, it’s about evaluating existing strategies and operations, revising them with ESG thinking in mind, and establishing teams and goals to drive your ESG priorities. Daly notes that as ESG data improves, firms will be better able to assess their impact, and customers will have improved tools to compare companies, which will drive even greater ESG activity.

In Conclusion

ESG should be a priority for small businesses because its significance to customers, suppliers, employees, investors, and communities is growing. Demonstrating that a small business is doing well by doing good can help to boost their brand in the eyes of social- and sustainability-minded consumers, and ESG factors are increasingly enabling companies of all sizes to better understand and address their own areas of risks.

Small businesses are in an excellent position to establish and advance ESG goals, and a little effort goes a long way. By revisiting their purpose, operations, and strategy, businesses can find small and large ways to increase sustainability, social impact, and transparency. As the ESG space continues to advance and as new indicators emerge to help businesses measure and analyze their social and environmental impact, ESG will become a practical and beneficial tool for long-term growth and success.

As part of its mission to help people and businesses prosper, Santander is here for every step of your company’s ESG evolution. Contact your Relationship Banker or visit today.

1. 2020 Small Business Profile. U.S. Small Business Administration Office of Advocacy.

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