02 Dec The Importance of ESG in the Middle Market
The growth of the middle market is crucial to any economy’s overall health. For middle-market businesses to continue to succeed during these uncertain times, they must consider ESG factors. Doing so can positively impact the company, its employees, and the community while leading to long-term, more robust financial performance.
My private client base predominantly consists of middle-market businesses. Educating and advising the middle market through the ESG business transformation is an area I feel passionately about. This journal post will explore why ESG is essential in the middle market and how businesses can get started.
Read on to learn more!
What is ESG for middle market companies?
Middle-market companies have annual revenues between $10 million and $1 billion. These companies account for a significant portion of the economy, yet they often receive less attention than their large-scale counterparts and publicly traded entities.
ESG stands for environmental, social, and governance. For middle-market companies, ESG is a way to measure their impact on society and the planet. It considers a company’s carbon footprint, employee practices, and commitment to social responsibility. By measuring their ESG impact, companies can set goals for improvement and track their progress over time. And fair warning, transparency, and sustainability are trending and will continue for the foreseeable future.
In addition, investors are increasingly interested in companies with solid ESG ratings, so it can also be a way to attract capital and build partnerships. Meanwhile, clients, consumers, and stakeholders now demand transparency and accountability. As more and more businesses adopt ESG strategies, it’s clear that this is more than just a fad; it’s a sustainable way of doing business that will help create a better world for all of us while building a competitive advantage for your organization.
Why is ESG important for the middle market?
From embracing ESG to creating a culture of sustainable investing, the middle market is quickly waking up to the importance of ESG considerations. Here’s why it matters:
First, middle-market businesses are often more likely to be involved in activities directly impacting local communities. As a reason, they need to be extra vigilant about managing their social and environmental components.
Second, mid-market companies are typically less liquid than their large-cap counterparts, making them more vulnerable to disruptions in the capital markets. As investors become more aware of the risks associated with climate change and other environmental and social issues, they are increasingly likely to prefer companies with strong ESG profiles.
Finally, many mid-market companies are family-owned businesses that tend to take a longer-term view than publicly traded firms. As such, they are more likely to be interested in sustainable practices that will improve their bottom line over the long haul. A good ESG strategy is more than short-term risk mitigation; it’s a long-term reward mindset that builds value across the organization and makes it more resilient, innovative, and attractive.
While challenges are associated with incorporating ESG efforts into the middle market, the potential rewards make it an essential consideration for any company looking to compete in today’s economy. And they are no longer just “nice to haves”; they will determine your company’s survival by embracing circular business models.
What are ESG frameworks?
Environmental, social, and governance (ESG) frameworks are standards organizations can use to evaluate their performance in these critical areas. While there is no one-size-fits-all approach, each framework has unique criteria that organizations can use to assess their progress.
For example, the Global Reporting Initiative (GRI) and the Sustainability Accounting Standards Board (SASB) Standards are widely used ESG frameworks that provide guidelines for reporting various environmental and social indicators. Another popular framework is the Task Force on Climate-related Financial Disclosures (TCFD), which helps organizations to disclose climate-related risks and opportunities.
In the middle market, ESG frameworks can help businesses to identify areas where they need to improve their performance and make more sustainable decisions. Companies can use these ESG metrics to show their commitment to social responsibility and build stakeholder trust.
What are the most suitable ESG initiatives in the middle market?
The most suitable ESG initiatives for a given middle market company will depend on several factors, including the size and scope of the business, the industries it operates in, and its geographical location. However, some general initiatives that may be suitable for many middle-market companies include:
1. Reducing energy consumption
Reducing energy consumption is one of the most effective ways to reduce your company’s environmental concerns. Several ways to do this include installing energy-efficient lighting and HVAC systems, weatherizing buildings, and using energy-efficient appliances. And don’t forget water consumption and CO2 emissions.
2. Increasing recycling and reuse
Increasing recycling and reuse helps reduce the amount of waste your company generates. This can be done by implementing recycling or upcycling programs, using recycled materials, and reusing products and packaging where possible.
3. Investing in renewable energy sources
Investing in renewable energy sources is a great way to reduce your company’s carbon footprint. Several renewable energy options are available, including solar, wind, and hydropower. These sustainable energy technologies can also pave the way toward a future of net zero carbon emissions, which is increasingly essential for any company’s reputation.
4. Improving employee health and safety
Improving employee health and safety is essential for creating a sustainable workplace. This can be done by providing safe working conditions, implementing health and safety programs, and offering employee wellness programs. ESG adoption can help businesses fulfill these primary responsibilities and make a name for themselves as an attractive workplace.
5. Promoting gender diversity
Developing and implementing policies that promote gender equality and diversity at all levels of the organization can help create a more equitable and inclusive workplace, which can lead to improved business performance. Moreover, most experts believe that companies with a gender pay gap can have a competitive disadvantage in the marketplace. This is one of the critical indicators that every management team needs to overcome.
6. Supporting local community initiatives
In the middle market, supporting local community initiatives makes good business sense. This includes supporting local businesses, donating to local charities, and volunteering for local causes that directly affect the communities in which you operate.
7. Implementing ethical sourcing practices
This can involve ensuring that companies in your supply chain adhere to fair labor practices and avoid sourcing from countries with poor human rights records. These ESG initiatives can help to protect workers’ rights and improve the company’s global reputation.
8. Engaging in responsible marketing practices
Engaging in responsible marketing practices is a great way to ensure that your company’s marketing efforts are aligned with your ESG values. This includes providing that marketing campaigns are not misleading or deceptive (like greenwashing) and being transparent about your marketing practices. Responsible marketing practices can help to protect consumers and improve the company’s public image.
By acting on these fronts, middle-market companies can help improve their social and environmental initiatives while potentially boosting their bottom line. In addition, implementing ESG initiatives can also help to differentiate a company from its competitors.
How can middle-market companies evaluate & improve their ESG performance?
There are several ways for mid-market companies to evaluate their ESG performance and identify ways to improve it. One is to conduct a materiality assessment of your company’s policies and practices related to ESG issues. During the process, it is helpful to engage with your employees and external stakeholders, such as NGOs or local community groups, to get many different perspectives on your company’s ESG commitments & performance. Materiality assessments highlight critical issues, provide a baseline, and help identify areas for improvement.
Another way to assess your ESG performance is to compare your company’s disclosure against industry best practices. This will help you understand what information financial institutions and institutional investors are looking for and whether you are providing it in an accessible and transparent way.
Mid-market companies can evaluate and improve their ESG policies by taking these steps. This will position them as leaders in responsible business practices and set the stage for long-term success.
Is ESG reporting compulsory for middle-market businesses?
While ESG reporting is currently voluntary for most businesses, there is a growing push to make ESG reporting mandatory for all companies. Some believe this will level the playing field, making it easier for investors to compare companies. Others argue that mandating sustainability reporting will help to ensure that companies are taking their environmental and social responsibilities seriously.
The debate is ongoing, but it’s clear that ESG reporting is not going away but evolving into its next iteration with rising government regulation worldwide. The best course of action for middle-market businesses is to stay ahead of the curve by early adoption. Not only will this put them in compliance with any future regulations, but it will also give them a competitive advantage in the marketplace. As large public companies face increasing regulatory pressure to report on ESG’s non-financial metrics, expect downward demands on the mid-market companies who supply them.
For these reasons, some companies provide external reporting, increasing their chances of securing much-needed investments and clients/customers.
What is the middle market business index?
The middle market business index is a broad measure of the well-being of medium-market firms in the United States. It is based on a survey of CEOs and other senior executives of middle market firms across various industries. The index covers multiple topics, including economic conditions, sales and profits, employment, investment, and credit access. The index is a valuable tool for businesses and policymakers and is released every quarter. It provides insights into the health of the middle market sector, which is a critical driver of the US economy.
What is the role of middle market executives?
Middle-market executives are tasked with leading organizations through economic growth and change periods. In doing so, they must balance meeting the demands of shareholders and investors while providing employees with the resources they need to succeed. Companies can also have a dedicated senior executive to look after their operations and make them more sustainable. All in all, middle market executives play a vital role in ensuring the economy remains strong and vibrant.
How can mid-market companies incorporate ESG in their supply chains?
Mid-market companies still need to incorporate ESG principles into their supply chains and may wonder how to get started. There are a few things to keep in mind.
1. First, it’s important to remember that small and medium-sized companies have an essential role in impacting supply chains. Even if your company is not a significant player in your industry, you can still set an example by implementing ESG initiatives throughout your supply chain.
2. Second, keep in mind that the business models may need to change slightly to incorporate ESG policies. This may mean working with different suppliers or adopting new procedures.
3. Finally, remember that you’re not alone in this transition. Many other companies face the same challenges and are making similar efforts to incorporate ESG into their operations. Remember, ESG is a process and one of continuous improvement.
The recent economic headwinds accelerated this trend as environmental issues gained greater prominence in the public consciousness. By considering these factors, mid-market companies can successfully incorporate ESG into their supply chains.
Conclusion
ESG in the middle market is essential because it reduces business risk in the short term and provides a long-term competitive advantage while helping ensure compliance with future regulations. Furthermore, mid-market companies that still need to incorporate ESG principles into their supply chains should consider doing so as soon as possible. Lastly, medium-sized companies play a significant role impact in moving our economy toward sustainability.
FAQs
What is a formal ESG plan?
Many businesses have instituted formal ESG plans to address various business concerns in recent years. Companies that have implemented formal ESG plans typically aim to improve their performance in the three ESG concepts – E, S & G. Businesses view their formal ESG plan as a way to improve their bottom line and address societal issues important to their employees, customers, and other stakeholders.
Who helps to achieve ESG goals for a company?
ESG starts at the top of an organization. A board member with an ESG background can help set ESG goals for a company. They work with management teams to ensure that sustainable practices appear in a broad range of corporate decision-making, from energy management to emerging regulations. In addition, they help to ensure that the company’s corporate structure and operations are aligned with its ESG goals. The ESG-competent board member may encourage the executive team to hire a dedicated ESG Officer as part of the organization’s ESG strategy.
Can ESG reduce operating costs?
ESG can help to reduce a company’s overall operating costs. By implementing strategies that focus on energy efficiency and sustainability, businesses can save money on utilities, waste disposal, and other expenses. In addition, ESG can help to improve employee productivity and morale, leading to cost savings further. As a result, there are clear financial benefits to incorporating ESG into a company’s operations.
How does ESG in the mid-market help with climate change?
ESG in the mid-market can help with climate change by providing guidelines for ESG activities that realistically accomplish climate crisis goals. For example, companies can significantly impact greenhouse gas emissions by setting goals to reduce energy consumption or switch to renewable energy sources. Policies to reduce water use or waste can also help conserve resources and prevent pollution. By taking concrete steps to address environmental issues, mid-sized businesses can play a role in mitigating the effects of climate change.
What is a middle market consumer?
Middle-market consumers fall between the lower and upper classes regarding income and net worth. They are described as people who usually buy things that are neither too cheap nor too expensive.
What are middle-market retailers?
Middle-market retailers are businesses that cater to mid-market consumers, offering products and services at prices that are neither too high nor too low.
What is a middle market manufacturer?
Middle-market manufacturers are companies that produce goods for mid-market retailers to sell. These manufacturers typically sell their products in bulk at discounted rates, allowing retailers to offer competitive prices to their customers.
We’d love to hear your thoughts on ESG in the Middle Market! Please send us an email at jennifer@faustglobal.com. If you’d like to learn more about Faust Global Partners and our ESG/S advisory services, please click here for more information.