Why invest in sustainability, especially as an SME?

Much has changed in the corporate landscape in recent years. A big part of this involves environmental, social responsibility and good governance (ESG) measures that help companies operate more sustainably and responsibly. Whether entrepreneurs are for or against incorporating ESG into their businesses, laws and regulations are changing rapidly, and entrepreneurs will have to respond sooner or later.

Back in 2014, the Non-Financial Reporting Directive introduced rules for companies with more than 500 employees of public interest. In 2021, the Corporate Sustainability Reporting Directive was adopted and has been applicable since this year. Even though these rules apply to large companies, this trend of tightened regulations will eventually affect SMEs as well. About 99% of all companies in the European Union are SMEs. So these companies are crucial to the European economy and can contribute immensely to making Europe more sustainable.

To encourage others to do something, there are two things you can do. In English, these ways are also known as “the carrot and the stick.” The stick mainly punishes to spur people on. Often laws and regulations are seen as the stick. On the other hand, we have the carrot, which actually rewards people when they do something. Often only the stick is seen, while the carrot can offer great benefits. In the context of ESG, there are two distinguished rewards: green loans and increased corporate values.

First, there are green loans. These are loans with lower interest rates provided to encourage companies to invest in sustainability. Sustainable businesses can qualify for such green loans if they meet certain requirements. Examples of requirements are that the company meets certain safety requirements or contributes to one of the EU’s Sustainable Development Goals. In exchange, the company can borrow at a lower interest rate, which lowers its cost burden. A concrete example of a green loan offered in the Netherlands is the BMKB-Groen scheme. This loan enables SME entrepreneurs to reduce their energy costs, for example, by investing in making their business premises more sustainable on favorable terms.

The second benefit to sustainability is increased business value. Entrepreneurs looking to sell their business place great importance on increased enterprise value. This enterprise value is determined by the company’s future cash flows and risk rate. Several studies show that sustainable companies are paid a higher price in mergers & acquisitions compared to less sustainable companies. There are several reasons for this. Large companies are already in the process of making their supply chains more sustainable. Suppliers and customers that meet their requirements are more likely to remain suppliers or customers. This lowers risk and increases certainty of future cash flows. Moreover, research shows that companies that invest heavily in ESG are more resilient in tough market conditions. For example, companies that were highly engaged with their employees and stakeholders were more likely to stay afloat during the tough coronary period. Such resilience in tough conditions means the company carries less risk, which also increases company value. Finally, part of the enterprise value is determined by the adjustments that will be made after the merger or acquisition; called integration costs. The more sustainable the company is, the easier it will be for the buyer to integrate the company. As a result, the integration costs are lower and the enterprise value will increase.

In short, ESG not only brings laws and regulations, but can also mean great benefits and opportunities. The sooner companies look into this and invest in it, the greater the difference they can build on now. Sooner or later, companies will have to start investing in ESG due to laws and regulations, and companies that start early will be better prepared for this in the future.