How to integrate ESG principles into SMEs

John Cradden explains the importance of ESG for long-term business success.

You’d be forgiven for feeling a little overwhelmed by all the acronyms flying around in connection with new EU environmental and sustainability regulations, such as CRSD, NFRD and CSDDD, never mind ESG.

Furthermore, as a business owner, you may have felt a sense of the sands regarding sustainability reporting shifting a little over the past few months amid recent EU proposals to relax the current schedule of new reporting rules.

But while rules are rules, what exactly what are the principles behind ESG and why should SMEs care about it?

What is ESG?

ESG stands for environmental, social and governance issues that contribute to long-term sustainability. It was initially used an investment term to describe the types of long-term risks that investors were exposed to, but has now evolved to mean a more stakeholder-centric approach to doing business that aims to look at all elements of supply chains and see how they can be made more sustainable.

The ‘E’ in ESG relates to issues like the circular economy, biodiversity, plastics use, water use and climate change. The social issues that can often emerge in supply chains include how materials are sourced, how workers are treated, how the company engages with its local communities, and diversity, equality and inclusion in the organisation itself. Finally, the governance side includes things like a company’s purpose, how directors get nominated, and how the board oversees the management of risk, such as cybersecurity and executive pay.

More about the ‘E’ than the ‘S’ or the ‘G’?

However, given the extensive media coverage, industry focus and dialogue over issues around climate change and pollution, many of us might look at ESG and assume it’s driven primarily by the environmental imperative.

But the ‘S’ (social) and the ‘G’ (governance) are very much part and parcel of the ESG agenda, too, but is possibly a little overlooked up to now. According to UK estate agents Savills, the environmental aspect has led the charge in terms of highlighting sustainability issues, “but is also better understood, more widely recognised and more effectively measured compared to the social and governance parts.”

Social

The Dublin Chamber of Commerce says a strategy for bringing about strong social impact can enhance a company’s reputation, attract investment, boost employee morale, and mitigate risks, while also feeding into broader ESG objectives.

Governance

Sustainability is now a board-level responsibility and a key strategic issue, according to a 2024 report by KPMG on ESG and governance in corporations. That said, they tend to have relatively small teams working on non-financial reporting, although many finance and accounting departments are becoming increasingly involved in the work of ESG reporting.

There is a lingering perception that ESG issues are not really linked with financial issues, but the truth is that not addressing them can lead to financial risks, according to SME support and funding agency SBCI (Strategic Banking Corporation of Ireland). This is mainly because as companies grow and evolve from start-ups to small businesses to medium-sized firms and beyond, potential investors will expect to see strong ESG credentials. That’s not forgetting the increasing number of regulatory requirements in this area.

So where are things at with regulations regarding ESG?

For a long time there was a lot of confusion about what it meant to be on top of ESG issues, but now there is a comprehensive framework of ESG regulations – some overlapping – that aim to introduce firm rules and benchmarks for all three elements.

Let’s start with CSRD. The EU’s Corporate Sustainability Reporting Directive is intended to modernise and strengthen the rules about ESG information that companies must report on. It replaces an older directive, the NFRD (non-financial reporting directive), and was due to take effect in phases from 2024, when large group companies with over 500 employees or net turnover above €40m were required to report on their sustainability efforts. Businesses with 250 staff or more and turnover of €40m or total assets amounting to €20m were due to come under the regulations in 2025.

By 2026, under current plans, listed SMEs with between 50 and 250 employees, a turnover of at least €8m or assets worth at least €4m would be obliged to report on this information – although the reporting requirements will not be as onerous as they are for large firms.

The Corporate Sustainability Due Diligence Directive (CSDDD) seeks to make companies accountable for human rights violations and environmental damage in their supply chains. Starting from July 2027, it will apply to firms with more than 5,000 employees, expanding to firms with more than 1,000 employees by July 2029. There are no plans currently to bring SMEs under this reporting net.

The reality for many SMEs

It would tempting to conclude that just because your small business is nowhere near the scope of neither CSDDD or CRSD, that you can just ignore them?

The reality is that if you are a supplier to larger companies, they are likely to ask you for a report of your own emissions. This is because bigger firms who are fall within the CRSD reporting net will need to obtain data about all the clients in their supply chain – large, medium-cap and small. For example, Microsoft has already contacted all their suppliers and resellers requesting that, by mid-2025, that they disclose their emissions and reduction plans, according to Fifty Shades Greener, a sustainability consultancy.

Microsoft is subject to Scope 3 reporting, which includes lifecycle emissions that arise both up and down its value chain, and which are quite hard work to measure. Scopes 1 and 2 reporting focuses on emissions that organisations emit from sources they own or control, as well as indirect emissions derived from the purchase of services like electricity, heat or cooling. These are relatively straightforward to gauge.

The good news is that any clients who are required to fulfil Scope 3 reporting and who ask you to report on your emissions to help them comply with their own reporting, you only need to provide information that covers Scopes 1 & 2, and not 3.

SMEs keen to integrate ESG reporting into their corporate strategies can follow the voluntary sustainability reporting standard (VSME) for SMEs developed by EFRAG (European Financial Reporting Advisory Group), which has been designed to fit their capabilities.

Whether legally required or not, SMEs risk being left behind by competitors if they don’t embrace sustainability. In the words of Dr Rosie O’Neill, head of sustainability at agricultural financial consultancy IFAC: “The key is to start small, build on existing practices, and ensure your initiatives are suited to your company’s size and resources.

“When managed well, the rewards – both in reputation and financial performance – can be significant. So, don’t be overwhelmed – just start. Small steps can lead to big gains when it comes to sustainability.”

EU Omnibus

However, the waters have been mudding somewhat regarding sustainability reporting standards thanks to new proposals by the European Commission to water down the reporting requirements amid concerns about the complexity, burden and cost of them, particularly for smaller companies.

In a nutshell, the Omnibus Simplification Package, as it’s been termed, proposes to limit the scope of CSRD to companies with more than 1,000 employees and also postpone by two years the requirement to comply with the directive.

Obligations under the CSDDD have also been watered down quite significantly as part of the Omnibus package, which was published in February 2025, meaning that companies under its scope will only need to look at direct suppliers.

Regardless of whether or not the rules are watered down, it’s understood that listed SMEs would not have to provide information beyond what is recommended by the VSME voluntary standard.

So while the rules regarding future sustainability reporting remain somewhat in flux, how have some SMEs taken on board ESG principles to date?

Doing things sustainably is a strategic goal that can be transformational for small businesses in sectors such as retail, tourism and hospitality, although not surprisingly, the focus is predominantly on the environmental aspect.

With the help of the Local Enterprise Office’s Green for Business programme and energy-efficiency grants, Siobhan Landy was able to reduce the energy consumption and operating costs of her business, the Ennis-based Sweet N Green.

The same programme also prompted Dublin-based potter Ola Wartak-Tolak to invest in an more energy-efficient kiln to reduce the operating costs of firing the pieces for her pottery business, Stories by Ola, while Cork-based specialist laundry and dry cleaning business Laundry Lab achieved a 28% reduction in energy consumption by investing in more efficient cleaning machines.

Grants are also available from Enterprise Ireland and the Sustainable Energy Authority of Ireland to support baseline reviews and planning in SMEs, and enable them to get the right expertise to point them in the right ESG direction.

Main image at top: Photo by Shridhar Gupta on Unsplash

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