Yesterday we had the 2nd session as part of the Award in Leading a Family Business accredited course. The main theme covered in this 2nd session was Corporate Governance. During this session I asked the participants if they ever heard about ESG (Environment, Social and Governance), since Governance is one of the elements of ESG. More than half of the course participants declared that they never did.

It could be that SMEs and family businesses believe that ESG is really for big, publicly listed businesses only. It is also likely that many SMEs and family business leaders are so engulfed in daily operational issues that ESG is not even on their radar. This is obviously worrying. SMEs and family businesses will soon (if not already) be faced with increased pressure from stakeholders (larger clients, banks) to be more transparent and accountable on ESG performance, no matter what the size of the company is.

So it would indeed be wise of SMEs and Family Businesses not to ignore ESG and ensure that it becomes a priority. I guess many SMEs and family businesses feel at a loss as how they should get started, which I what I will try to pen out in this article.

So ESG focuses on a company’s efforts in three areas – Environmental, Social, and Governance.

• Environmental matters focus on climate change, carbon footprint, emissions, energy use, land conservation, recycling and waste management, and water and air quality.

• Social matters focus on issues such as ethics, privacy, cyber security, labour practices, child welfare, health and safety, human rights, diversity, equity and inclusion, employee engagement, workforce development, and workplace culture.

• Governance matters include board composition, director independence, board evaluation, director and executive compensation and succession planning.

The three ESG areas should be viewed holistically rather than in silos. That’s because environmental, societal and economic wellbeing are all intertwined. When you think about it, this interdependence is clear. For example, climate change is not just an environmental issue with economic risks, but it is also a social justice issue because it many times effects worse people with lower incomes. In the same way, ESG risks and opportunities overlap. You might think of Governance as distinct from Environmental and Social issues. However, before you can make meaningful progress on climate and social change matters, you need the foundation of a strong governance structure. Which is why I constantly harp that the starting point for any family Business and SME to tackle ESG matters, is the G of Governance. If a family business or SME does not have a solid Governance ecosystem with the rights structures and processes than they stand no chance of getting serious on ESG.

You may be asking me why should an SME and Family Business be concerned about ESG? Well besides the already outlined reason given above, that stakeholders like larger clients and banks, will require SMEs and family businesses to start reporting on various metrics related to ESG, there are also other important compelling reasons. The growing public concern about the effects of climate change, SMEs & family businesses will been constantly more under the spotlight to have them play their part in making this a better world for everyone. ESG brings with it opportunities for businesses if they’re able to seize them. SMEs that embrace ESG can attract investors or bank financing, appeal to customers that want to support a ‘green’ company and help attract and retain employees who want to have a positive impact on the world. In essence, by not concerning yourself about ESG, you would pushing your SME & family business towards it becoming irrelevant to various stakeholders, be it banks, suppliers, customers and employees.

SMEs and Family Businesses, have the advantage of being more nimble and agile. SMEs are often closer to their customers and a likely to have a brand, product, or service that their clients know about and identifies with. This could all play in favour of such SMEs as they start the journey of taking ESG seriously.

However as I said, I strongly believe that it is through the G (Governance) of ESG that sensible progress stands a chance of being registered. Which is why the board of directors of SMEs and family businesses has a pivotal role. Such Boards need that ESG is integrated into strategy and that the Board can truly oversee emerging risks and opportunities. To be able to do so below please find a simple guideline process of how to get this done.

• Step 1: Understand the Landscape. This is the learning phase, during which the board gains a broader and deeper understanding of ESG issues and trends. While the board eventually needs to learn about all three ESG categories, it’s best to start with the area that aligns most closely to the organisation’s purpose.

• Step 2: Decide Where Board Oversight is Needed. This is a prioritisation phase, during which the board scopes out the various issues and decides where the board will focus its oversight. Doing this requires identifying how each ESG matter relates to the company’s purpose, strategy, and risks.

• Step 3: Allocate Responsibility. In this phase, the board decides whether the full board or a committee will take primary responsibility. Oversight might be assigned to an existing committee or split among several committees, or the board might decide to establish a new ESG committee.

• Step 4: Conduct a Gap Analysis. In this phase, the board finds out the company’s current status in each identified area.

• Step 5: Prioritise and Plan. With this phase, the organisation moves into action mode, prioritising issues, developing plans, and assigning resources to close the gap. The board should take care to ensure plans are integrated into the organization’s culture and operations, rather than being just an add-on.

• Step 6: Monitor and Report. Finally, the board should determine what metrics it wants to monitor and how often, as well as what information will be disclosed to interested stakeholders.

So in conclusion, my advice to SMEs and Family business, is to get started. However you cannot get started before you have all in place to do so. So I strongly advice that before you get started to do the following two things:-

1. Ensure that you basic Governance structures and processes are in place. Do you have a functioning board of directors? Is the board of directors well setup with the appropriate tools and skills to discuss and decide on important strategic matters. Having independent non-Executive directors or advisors on such boards would help. If not, please get your act together as no business can grow and have a successful & sustainable future if it is still relying on an informal and amateurish decision making system.
2. If at least a basic Governance structure is in order, the next step is to start learning on ESG.

If the above two matters are well covered you can then start moving into the next phase of prioritising initiatives that align with the company’s purpose.

Malta Enterprise launched an ESG advisory grant scheme last September, which closed on the 31st October 2023. However, the recent Budget speech outlined that this ESG Grant Scheme will open again in 2024. EMCS is an approved advisor under this scheme. Feel free to contact me on silvan.mifsud@emcs.com.mt to have a chat on how we can help you on this front.