Sustainability Reporting for SMEs

Competitive Advantage Through Transparency

Elaine Cohen

• Publisher: Routledge
• Year: 2017
• ISBN:
  9781351275620
• Edition: 1
• Topic: Commerce
• Subtopic: Commerce Général

Sustainability reporting can help companies make more money. Sustainability Reporting for SMEs shows you how. Reporting, done well, requires a company to make public a set of promises that bind the company to its sustainability commitments. By adopting a transparent approach to both business practice and reporting, SMES can gain significant business advantage, both in terms of more effective internal processes and in terms of reputation and business-building.Elaine Cohen provides guidance and tools for actual actions that will improve the sustainability impacts of your company, and a process for reporting that adds value which is much greater than the printed or online report itself. This book will help SMEs develop "the transparency habit" so that they both make more money and contribute more proactively to the sustainability of our society and planet.It is vital reading for SME owners and managers, entrepreneurs, business and sustainability students and teachers, and consultants. Sustainability managers in larger organisations will find this book helpful in assisting their organisations manage their supply chains which undoubtedly include several SMEs.

Chapter 1
The SME Approach to CSR

In This Chapter, We Will:

• Define what we mean by SME
• Provide a perspective of the role of SMEs in our national and global economies
• Explore the characteristics of SMEs and the way they differ from MNEs
• Introduce the concept of CSR and a roadmap to sustainable business

SMEs are often regarded as the powerhouse of our global economy because they employ most of the world’s employees and generate close to half our global economic output. Many SMEs form an essential part of the extended supply chain of larger national and multinational companies, who rely on the products, services and focused expertise of these smaller companies to help them achieve growth. In fact, many global companies have a business model which is entirely dependent upon SMEs in their supply chain, such as Nike, who reports having 600 factories employing over 820,000 people in 46 countries involved in the manufacture of Nike products.¹

SME development and growth is an economic priority for many regions in the world. In Europe, SMEs remain ‘the backbone of the European economy, with some 20.7 million firms accounting for more than 98 per cent of all enterprises’. These SMEs employ 67% of Europe’s total 87 million workers, and deliver 58% of gross value added.² In the Europe 2020 strategy, where a top priority is increasing employment opportunities and raising the employment rate, while reducing poverty and social exclusion, support for SMEs and the entrepreneurship which is often associated with small business creativity and agility, is a central theme.³ In the Asia-Pacific region, where SMEs form 90% of total companies and 60% of the workforce, SMEs have been noted as a ‘key to building state of the art economies’ and support is targeted at removing barriers to trade and encouraging start-ups.⁴ In China alone, there are 42 million small- and medium-sized businesses. In the US, the latest 2007 Census recorded close to six million SMEs with a total of over 60 million employees and sales revenue of over $11 billion.⁵ SMEs are the largest group of US exporters and the largest users of imported goods. A focus of US government policy is to assist SMEs to grow their exports.

Defining SMEs: 500 employees/Euro 50 million turnover

The level of SME activity differs considerably in markets around the globe, as indeed does the definition of what an SME constitutes. The European Commission definition of an SME⁶ covers medium-sized businesses which employ below 250 people and generate revenues of below Euro 50 million, and micro-business, which employ below 10 people and generate revenues of below Euro 2 million. In the US, however, SMEs tend to include all companies of below 500 people and revenues reaching below approximately $25 million.⁷ In China, there exists a complex matrix of definitions which differentiates by sector and business type, and includes businesses which employ up to 2000 people with revenues of over $190 million⁸ at the upper limit. For the purposes of this book, we will apply an upper limit of approximately 500 employees and Euro 50 million or USD 65 million in revenue. This keeps us in the range of companies which have largely similar characteristics, mainly local (though they may sell products or services internationally) and often privately owned.

Having said this, the SME sector is three sectors all in one, encompassing micro-businesses with up to 10 employees, smaller businesses with up to 50 or so employees and all the rest. These types of businesses are inherently different. A company with up to ten people may always feel like a start-up, whereas a company with 500 people needs structure, processes, frameworks and a very strong communications programme. In terms of CSR, however, opportunities abound for all types of SMEs and, as we shall see, are available to be tailored to meet the specific company profile, structure and state of mind of any business in the SME category.

Characteristics of SMEs

Given the diversity of SMEs, it is difficult to generalise, but we can discern 12 key characteristics that typify most of the companies in this category (see Figure 1). Probably the most significant feature here is the very dominant presence in most SMEs of the owner-founder who remains at the helm of the company throughout its life, which may include the subsequent handing of leadership to family members who have grown up with the business. While many exceptions exist, in which small companies have grown into larger corporations, the vast majority of SMEs remain SMEs throughout their lifetime and continue to be guided by their founding spirit. Often, given the nature of entrepreneurs, smaller business owners drive their business from a sense of passion to see a change in the world or provide a service which they deeply believe offers value to society, often based on what they are personally able to achieve or accomplish because of the skills and experience they have acquired. This aspect of SMEs – the initial values-based passion for change and contribution to society – which often transcends an absolute desire to put profit at the top of the priority list, is what typically draws SMEs closer

FIGURE 1. key characteristics of SMEs

to one of the fundamental tenets of a CSR approach: values-based, ethical, humanely driven business which has a clear understanding of its role in society. (Of course, many SME founders are motivated primarily by the need to earn a living but even so, they often remain true to a set of core values.)

Other key characteristics of SMEs which help these companies survive and thrive include a lack of formal (and bureaucratic) structure, creativity and ability to develop highly focused expertise which is relevant to local and global value chains. Driven by a vision for change, SMEs recognise opportunities as they arise, often intuitively, and are able to make changes to adapt and exploit such opportunities with a quick response and a practical ability for creative improvisation. Often part of a local community, SMEs maintain close ties with their local networks and surround themselves with relationships which are based on trust throughout the long term, providing a buffer against potential risk or unforeseen adversity. Additionally, SMEs have largely become early adopters of the incredible range of tools available on social media, which are largely cost-free and enable small businesses to achieve a presence on the internet through blogs, Twitter, Facebook, LinkedIn, YouTube and many others. SMEs who have something to say now have a range of channels they can exploit to make their voice heard, gain recognition and become a part of a national or even global business network. More importantly, strong use of these tools brings new business. I recall the time I heard Twitter founder Biz Stone talk about how a local bakery would use Twitter to inform customers that a new batch of freshly baked loaves were just about to go on sale. The loaves were snapped up before he could get the last one out of the oven. As an SME founder-owner myself, I can categorically say that the vast majority of business that we do is a direct result of our strong internet presence. This is true for business in our local market, and absolutely true for global business which now exceeds 50% of our revenue.

On the other hand, these fantastic advantages of SMEs, which larger corporations often envy, have their corresponding downside. Owner-dependence may lead to lack of ability to grow beyond an initial, possibly limited, vision. Intuitive decision-making may lack the broad consultation necessary to reach balanced or better outcomes. Lack of structure, planning and evaluation of risk may dictate an inability to leverage resources to increase scale and go beyond current boundaries. Lack of financial planning may result in cash-flow problems strangulating the business, especially as access to financing is often elusive or expensive. Social media presence may take up much time, but may not be targeted in a way which delivers best responses.

CSR for SMEs

As a concept, CSR is a way of doing business and not an addition to doing business. Sustainability at its core should assist companies in doing better business both in the short term and the long term. Many SMEs are already doing this, even though they might not call it CSR, or sustainability, by virtue of the values that drive their business, the personal relationships they maintain with employees and customers (stakeholder engagement) and the desire to make a contribution to society. SMEs can leverage the advantages of CSR, building on this inherent alignment with sustainability principles, through adopting a more structured and transparent approach.

While a full-blown sustainability programme which has global impact, such as the approach of Unilever, in the Sustainable Living Plan,⁹ or Kingfisher, the home improvement retailer, which has declared a ‘net positive’ approach to doing business,¹⁰ or of Nestlé, which has pioneered the ‘shared value’ business model,¹¹ may seem beyond the reach of the SME community of businesses, SMEs must remember that somewhere they are part of the global value chain. Somewhere, an MNE¹² is relying upon an army of SMEs to support its own business sustainability. Somewhere, a consumer is affected by the actions of several SMEs. Everywhere, SME employees deserve the same protection of their rights as MNE employees; SME customers deserve the same opportunity to have their aspirations and concerns addressed; SME suppliers, often SMEs themselves, must be brought on board with the collective effort. Not being big is not a reason, and certainly not an excuse, not to embrace the principles and practices of a sustainable business. By making CSR part of the way they do business SMEs gain business benefit while making a respectable and necessary contribution to our ability to live well, now and in the future, and protect our planet.

The CSR-sustainability model

I often work with a simple model which shows the process of sustainability in action in companies. While typically I use this framework with larger companies, it can be applied to smaller businesses.

The concept is simple: CSR (or sustainability, which we use as interchangeable terms), lies within a tunnel of three prerequisites:

1. Leadership and strategy: these are necessary to provide the drive, support, authority and long-term thinking necessary for a successful CSR-aligned business model.
2. Ethics: an ethical approach to doing business is not CSR. It is a necessary prerequisite of CSR.
3. Governance: a clear direction from the Board of Directors, or in the case of SMEs, the company management, who ensure the right controls, risk management processes and compliance frameworks are in place.

Once these prerequisites are in place, to a greater or lesser degree, the process of developing a sustainable business and sustainable contribution to society can move forward with consistency and purpose. For larger corporations, this makes sense. For SMEs, leadership, ethics and governance may be more implicit rather than explicit. A good exercise for any SME would be to try to articulate these prerequisites more specifically: a statement of vision and mission, a set of values and brief Code of Ethics, a statement of the company’s management approach or key policies and procedures for key company processes together with an analysis of the risks and challenges the company faces, and pathways to overcome the risks. These are not difficult things to do; but they require a few hours away from the daily routine to think, discuss and formulate. The process may well deliver some insights about the SME business and how to progress along the sustainability journey.

Once the prerequisites are in place, we categorise the sustainability roadmap progression into five stages, which are not necessarily a linear progression, but more of an interactive and iterative process, where companies may start at the beginning, end or middle and move back and forth as their processes, understanding and experiences evolve.

• ✓ Materiality: this is the identification of the most important (material) issues from a sustainability standpoint that any business should address, and requires consultation with key stakeholders in order to achieve a full and considered conclusion.
• ✓ Responsibility: this is the different actions your company takes to minimise the negative impacts of the different types of your business activity on people, society and the planet. This is sometimes referred to as ‘do no harm’.
• ✓ Shared value: this is the opportunity area of sustainability. It relates to creating a social benefit through innovative new business solutions thereby generating economic and social benefits.
• ✓ Transparency: this is about reflecting your sustainability performance in a balanced, comprehensive and accurate way, to your stakeholders, so that they can make informed decisions about their relationship with yo...

Table of contents

• Cover
• Title
• Copyright
• Abstract
• About the Author
• Contents
• Preface
• Foreword
• 1 The SME Approach to CSR
• 2 The State of Sustainability Reporting
• 3 The Business Advantage of Transparency for SMEs
• 4 The Roadmap to Transparency for SMEs
• 5 Guidance for Developing a Sustainability Report
• 6 A Few More Words About Transparency
• Links and Resources
• Notes