Strength in numbers - Sustainability and the SME

Sustainability is often seen as the domain of large corporates but SMEs have the collective potential to be more powerful players. Sheila Killian explains why

Social and environmental sustainability is often seen as more relevant to big multinational companies (MNCs) than to SMEs, small-to medium enterprises employing no more than 250 people.

MNCs are more likely to have a sustainability strategy, and resources for its implementation, monitoring, reporting and communication. 

They are more likely to report externally, integrating their reporting across sustainability and financial activities, and to be scored by ESG rating agencies. 

This does not mean that MNCs carry all the responsibility or should reap all the benefits, however. 

SMEs are enormously impactful in aggregate and have a huge amount to gain by getting involved. So, why and how should they engage?

The potential impact of SMEs on sustainability

SMEs have a massive collective impact. In Ireland, they account for seven jobs in 10. While large companies are commonly exporters, SMEs tend to serve their local region. 
In terms of where people live, work, shop and spend their leisure time, smaller enterprises dominate. This amplifies both their responsibility, and the opportunities open to them.

Because SMEs are embedded in their communities, they often make a huge contribution socially without realising it. This may lie less in strategy than in values. 

David O’Mahony of O’Mahony’s Booksellers Ltd, a long-established independent bookshop in the south-west, sums up the position: “It’s only when you really think about it and put all the things together that you realise that there’s a lot more going on … [in corporate responsibility and sustainability] … than we would have probably realised ourselves.” 

O’Mahony’s enjoys high social capital locally, gained through understated good work for the community and environment, derived from values and a sense of neighbourliness rather than from formal reporting. 

Why SMEs do not report

Despite this implicit moral accountability, many SME owners do not think about reporting externally on their sustainability. This is often because they don’t see the value to be gained.

Compared with MNCs, there is much less separation between ownership and management/control in SMEs. 

Therefore, the need for both internal and external reporting is reduced because the main shareholders are already intimate with what is going on in the business, and employees are closer to the leadership. 

Unless the business is considering raising external finance, there is little need to consider how potential investors might perceive it, and if there is a perception that customers are not interested in sustainability activities, these will not be reported. 

It seems to come naturally to SMEs to be community-oriented, however, often because they are family-owned, and such behaviour reflects the origins and values of the family. 

Such firms tend not to have formal, written codes of conduct, but instead propagate the personal values of their owners, who do not consider that a separate, published set of values and reporting on their social and environmental activities is necessary for business.

Why SMEs should report

One reason for SMEs to begin some form of sustainability reporting is so that they can compete with MNCs locally to attract and retain talented employees. 

The labour market is tight, remote working has shifted the power balance, and younger generations are more focused on sustainability. 

Increasingly, SMEs are framing their sustainability credentials more clearly, and connecting them with their employer brand so that they can attract the talent they need. 

There is also a consumer angle. The challenge posed by behemoth online retailers to small, local bricks-and-mortar businesses is now well-rehearsed. 

A small, independent business, like a bookshop, needs to clarify and articulate its values and personal touch as a competitive advantage. 

This ‘personality’ needs to be communicated externally if it is to reach the right customers effectively. Sustainability reporting can convey a sense of what the company is all about, its values and purpose – its ‘soul’.

A third reason, particularly applicable to SMEs operating in the business-to-business sphere, is that reporting on strong sustainability metrics confers an advantage in entering the supply chains of larger firms. 

If, for instance, an MNC is moving towards zero-carbon, it is likely to require smaller companies in its supply chain to be also on that journey. 

A fourth reason to report is the internal value to be gained from paying attention to sustainability. Measuring, reporting and constructing a narrative around social and environmental values will improve the culture of the business, and pave the way to greater innovation. 

Hotel Doolin in County Clare is an example of a small business that tells its sustainability story effectively. It has shortened its supply chain by buying local produce. 

The hotel harvests rainwater, it has eliminated single-use plastics, and uses environmentally low-impact energy and heating. It became Ireland’s first carbon-neutral hotel in 2019, under the Green Hospitality Programme, ahead of many larger competitors. 

The business also promotes social sustainability, employing refugees, supporting local community groups and actively seeks to be a good employer. This has enhanced its reputation not only locally but nationwide. 

Partnering with not-for-profits

Smaller companies that are ambitious in terms of sustainability targets will inevitably want to achieve things that are beyond their capacity. 

If, for example, a business decides to work on the water quality in the area in which it operates, it may lack in-house expertise, jeopardising its credibility with the local community. One solution may be a partnership with a not-for-profit organisation (NFP).

NFPs often have the expertise to tackle social and environmental issues but lack the resources, whereas companies may have resources (money) but lack the knowledge. A partnership can achieve sustainability goals if the match is right. 

The NFP needs to be operating in the area in which the company wants to make progress, and the company needs to align with the NFP’s approach to society and the environment. 

Mutual respect and consultation are key. At worst, a partnership can be seen as a ‘fig leaf’ for the SME and can undermine the legitimacy of the NFP. At best, it can be truly impactful for all involved.

SMEs’ supply chain responsibilities 

MNCs are famously held responsible for the working conditions in which their goods are produced by companies in their supply chains. Scandals, including the sweatshop labour exposed in the 1990s to the Rana Plaza garment factory collapse in Bangladesh in 2013, have forced companies such as Nike, Gap and Nestlé to change their practices. 

Bad practices persist today, however, even where goods are produced close to home. In 2020, for example, it was revealed that online vendor BooHoo was selling clothes made in extremely poor working conditions in Leicester in the UK. 

For a small, independent retailer, this means that, unless it takes steps to assure itself of the origin of the goods it sells, the risk remains that all or some element/s of those goods may have been produced in sweatshop conditions. 

Smaller firms may lack resources to monitor conditions in their suppliers’ factories. Nor are they likely to have the requisite buying power to impose a code of conduct on their suppliers. So, what can they do about the conditions under which the goods they sell are produced?

The International Labour Organization has clarified that a firm has responsibility as far up the supply chain as it has ‘reasonable influence’. 

Large firms can leverage direct buying power to positively impact supplier. Starbucks works with its coffee producers to bring them up to higher social and environmental sustainability standards, for example. 

A small trader is, however, limited to choosing suppliers wisely, and using their influence when feasible, perhaps working with other firms in the sector.

The key differences between the supply chain responsibility of MNCs and SMEs, then, relate to power and influence. This principle also applies to other areas of sustainability. More power means more responsibility and the potential to make a positive impact. 

SMEs need to address all the key issues of fair pricing, employee welfare, human rights and environmental impact within their own operations and – as far as possible – outside of them, bearing in mind their levels of resources and power. 

The key questions here are: “Are we doing all we reasonably can to achieve sustainable practice?” and “Are we seeking to improve?” 

Sometimes, acting in concert with other SMEs, can achieve more. The outcome may not be perfection, but honest efforts in the right direction will carry collective weight. 

Sustainability and the SME advantage

While corporate sustainability is often seen as the domain of MNCs, SMEs – because of their numbers and connection with, and impact on, society – are potentially more important players. 

Many SMEs do not report their sustainability policies for several reasons, including informality, time and resource pressures, unfamiliarity with reporting standards and frameworks, or because a strong internal locus of value and ethical behaviour is already vested in their owners and leaders. 

However, SMEs generally have high levels of engagement with their local communities and implement sustainability on an intuitive basis, drawing on leaders’ personal values. Reporting these efforts can bring significant advantages externally and internally. 

Despite a lack of resources relative to larger companies, the key to building sustainable value for SMEs lies in making the best choices that are within their power at a given time.

Sheila Killian is Associate Professor at Kemmy Business School, University of Limerick, and author of Doing Good Business: How to Build Sustainable Value