Assets Under Management AUM

Can SMEs succeed with a wider ESG impact?

Through Dr Axel Kravatzky a figure recognized at the highest international level in the Governance of Organizations

Disclaimer: the opinions presented are those of the author and do not necessarily represent those of any of the organizations with which he is associated. Comments and reactions that advance the regional dialogue are welcome at [email protected]

Studies have shown that small and medium-sized enterprises (SMEs) succeed if they take into account their wider impacts, in particular their environmental and social impacts. In this column, we take a look at how the now ubiquitous term “ESG” came about and how it relates to SMEs. In Part 2, we explore the potential of an ESG approach for the Caribbean fashion industry.

Two publications are behind the launch of the term ESG (Environmental, Social, Governance) in the public consciousness: the first was entitled “Who Cares Wins”, in 2004 under the auspices of the United Nations Global Compact. Former Secretary General Kofi Annan invited 50 CEOs of major financial institutions to find ways to integrate ESG dimensions into financial markets. A year later, in 2005, a second major UN report was published, this time a collaboration by the UNEP Finance Initiative with the law firm Freshfields Bruckhaus Deringer. It was entitled “A Legal Framework for the Integration of Environmental, Social and Governance Issues in Institutional Investment”.

The first report recommended that all financial market participants integrate ESG factors into their financial analyzes as this would lead to better investment markets as well as to the sustainable development of the planet. The second report examined the question of whether the inclusion of ESG dimensions in investment policy (asset allocation, portfolio construction and selection of securities or bonds) should be voluntarily authorized, legally required; or if the law and regulations could be an obstacle. The report concluded that as the link between ESG factors and the objective of conventional analysis of the value of investments, in particular financial performance, is increasingly recognized, and that financial performance could be predicted more reliably when ESG factors are included in the analysis, “it is clearly permissible and is arguably required in all jurisdictions” (which were included in the report analysis).

These reports formed the basis on which the Principles for Responsible Investment (PRI) were launched in 2006 and the Sustainable Stock Exchanges Initiative (SSEI) was launched in 2007. In 2014, I supported the introduction of stock exchanges from Barbados, Jamaica and Trinidad. & Tobago to SSEI, and the Jamaica Stock Exchange has become one of the 110 Partner Members of SSEI. The total number of PRI signatories and the size of assets under management (AUM) continue to grow at an increasing rate.

What about SMEs?

The original intention of those who introduced the term ESG into public discourse was to harness the power of large financial institutions and institutional investors towards the definition and the UN Sustainable Development Goals. The objective was to get institutional investors to integrate ESG dimensions into their analysis. Companies in which institutional investors invest would then be required to report on ESG dimensions.

This means that a first link exists for companies in which responsible investors would like to invest. The Jamaica and Trinidad and Tobago stock exchanges both have junior or small and medium-sized enterprises (SMEs) segments that they actively promote, and many funds are looking to invest in ESG-performing companies.

There are two other links, both of which strengthen the links between ESG and SMEs in the case of the Caribbean.

The second link comes from other forms of corporate capital raising – in particular international development finance institutions, private equity, venture capital and banking. All three forms are very well endowed in the Caribbean and there is a lot of capital available for companies that can demonstrate strong ESG performance. In the case of the bank, we are only in the early stages with Republic Bank Holdings Ltd, headquartered in Trinidad and Tobago, as the first and only CARICOM-based bank to have signed the Principles. bank responsible for UNEP / IF.

The third link has the broadest applicability for SMEs and holds the real key to success for all others as well: an impact on sustainability focused on ESG as a competitive and collaborative differentiation strategy. There is a lot of hyperbole, hype and hot air in ESG talk. Study after study, it is claimed to show that companies that perform well in terms of ESG also outperform their peers in terms of financial performance. More rigorous studies show that this is not entirely true for everyone – but their findings are essential to understand and apply as they lead to sustained and lasting success!

SMEs in the fashion industry

Overall, SMEs represent a very important part of the value created, of employment, but also of the waste generated. Next week, in part 2 of this article, I will look at the case of the Caribbean fashion industry to illustrate the key points for SMEs to successfully and strategically improve their ESG practices in order to achieve their potential. According to our research on the Caribbean fashion industry five years ago, this is an industry where the total number of people employed has declined significantly across the Caribbean, but which holds great potential and, as in many other sectors, the global drive to put the world on a more sustainable basis creates significant new opportunities for companies that master the ESG practices that are right for them.