Growing numbers of small and medium-sized enterprises (SME), spanning a range of sectors and geographies, are signaling their commitment to an ESG-rooted integrated purpose—that is, a people, planet, and profit triple–bottom-line purpose. This article explores SME-related ESG opportunities and challenges. It also describes B corporation certification and discusses third-party attestation services.
A growing number of institutions of all sizes, sectors, and geographies are signaling their commitment to an environmental, social, and governance (ESG) integrated purpose: a triple-bottom-line stakeholder purpose serving people, planet, and profits. For example, the results of a 2022 NAVEX Global survey revealed the following.
- The vast majority of respondents say their company has either increased its focus (46%) on ESG this year or that its focus will stay the same (41%).
- Only 3% of respondents report plans to decrease spending on ESG factors in 2022, an even smaller group than the 6% who reported plans to decrease ESG spending in 2021.
- 83% of respondents agree strongly or somewhat that a business’ brand reputation is impacted by ESG factors (https://bit.ly/3IExnn2).
What is driving this ESG movement? A mandate of sorts. A case in point is recent actions by the SEC demonstrating a commitment to greater transparency in ESG impacts by issuers (https://bit.ly/3AOHvYt). For example, on May 25, 2022, the SEC proposed to enhance disclosures by certain investment advisors and investment companies about ESG investment practices. According to SEC Chair Gensler, “It is important that investors have consistent and comparable disclosures about asset managers’ ESG strategies so they can understand which data underlies funds’ claims and choose the right investments for them.”
Small and medium-sized enterprises (SME) are playing a crucial and unique role in this international ESG movement. According to Moody’s ESG Solutions, “As the backbone of every economy, small and medium-sized enterprises are at the forefront of sustainability impact” (“Moody’s Launches ESG Scoring Tool for Small Businesses,” https://bit.ly/3uRNnfB). Why is that?
Part of the reason is the sheer size and unique economic, social, and environmental impact of the SME population globally. According to the World Bank, SMEs “represent about 90% of businesses and more than 50% of employment worldwide” (https://bit.ly/3OQYOfB). Although estimates vary, Statista reported there were roughly 212 million SMEs globally in 2020 (https://bit.ly/3yQXunv). How an SME is defined, however, varies by jurisdiction and even by industry sector. Exhibit 1 presents examples of such differences.
Small Business Definitions by Jurisdiction, Selected Examples
Another reason SMEs have a unique impact on the ESG movement is stakeholder engagement opportunities. As compared to larger companies, stakeholders often have better access to SME management teams to convey their expectations concerning positive, long-term changes impacting ESG, including diversity, equity, and inclusion (DE&I), or, for example, compliance with EU Directive 2014/95/EU on Non-Financial and Diversity Information. In addition, SMEs may be more nimble than larger companies when approaching such disruptions and transformations.
Sustainable Business Purpose: SME Challenges and Opportunities
According to Accenture, while opportunities exist, SMEs face a range of risks associated with integrating an ESG purpose:
Environmental, Social, and Governance (ESG) are three key factors used to measure a company’s sustainability and social responsibility performance. While the acronym has recently gained attention, ESG risk failures are widely known. They can take the form of regulatory interventions, reputational damage, and investment risk over labor practices, civil rights, market manipulation, data privacy or environmental degradation (https://accntu.re/3bGuOnU).
In basic terms, three scenarios of such challenges emerge: 1) failing to embrace an integrated ESG purpose, 2) embracing ESG with a check-the-box approach, and 3) encountering risks when holistically integrating an ESG purpose. Exhibit 2 presents examples of such risks.
Risk of Failing to Embrace ESG or Checking the Box on ESG
Once an SME makes the decision to operate an integrated ESG purpose, various challenges, such as resource constraints, emerge. Exhibit 3 presents additional examples.
Challenges Implementing and Operating an Integrated ESG Purpose
While integrating an ESG purpose is disruptive and risky, a range of material ESG opportunities are available that would potentially outweigh the risks; for example, enhancing the brand and increasing loyalty from employees, customers, vendors, and the community. Exhibit 4 presents examples of ESG opportunities adapted from McKinsey.
ESG Value-Driven ESG Opportunities
Engaging key stakeholders can facilitate the identification and prioritization of material opportunities. For example, ESG Lynk, a sustainability consulting firm founded by one of the authors, formulates a set of diagnostic questions to aid their clients in identifying opportunities that link purpose and strategy to each of the categories of ESG. Exhibit 5 presents examples of such diagnostic questions.
Diagnostic Questions Facilitating the Identification of ESG Opportunities
The opportunities identified are then narrowed down to those that will most materially impact long-term value creation and sustainability.
ESG Reporting: Accountability and Choice Overload
Who are organizations accountable to? The ESG movement has extended accountability from an owner/shareholder profit maximization primacy model to a stakeholder primacy model, focused on a triple bottom line of people, planet, and profits. Commitments to a triple–bottom-line purpose are inevitably accompanied by expectations of ESG-impact transparency. According to a recent report authored by the Association of International Certified Professional Accountants [the AICPA, Chartered Institute of Management Accountants (CIMA), and the Center for Audit Quality (CAQ)], “The building blocks of reliable, comparable and relevant … [ESG] information begin with a foundation of quality reporting by company management” [AICPA, CIMA, and CAQ, ESG reporting and attestation: A roadmap for audit practitioners, 2021 (https://bit.ly/3p0r7NZ)].
Organizations communicate sustainability information for several reasons, including signaling a commitment to ESG, conveying ESG strategies and risks, and reporting on ESG performance. Communication formats include corporate social responsibility (CSR) reports, press releases, website disclosures, and integrated reports.
A wide spectrum of sustainability performance measurement and reporting standards and frameworks are used to prepare ESG communications and reports. Notable examples include the Global Reporting Initiative (GRI) Standards, the United Nations’ Sustainability Development Goals (SDG) and the International Sustainability Standards Board’s draft framework [expected to incorporate the standards and guidance previously issued by the International Integrated Reporting Council (IIRC), Task Force on Climate-Related Disclosures (TCFD), and the Sustainability Accounting Standards Board (SASB)].
In general, standards provide specific and replicable requirements for what should be reported on each topic. Frameworks provide principles-based guidance on how information is structured and prepared, and which topics are covered. Standards contribute to making frameworks actionable, comparable, consistent, and reliable disclosure. Standards and Frameworks are complementary, and are often used together.
According to Baker, Eccles and Serafeim, “choice overload” creates ESG communication and reporting challenges:
While sustainability has become a central concern of many managers, investors, and consumers, a major sticking point remains for the ESG movement: There is still no universally adopted standards for how companies can measure and report on their sustainability performance. Instead, we have a number of NGOs working independently to develop standards for sustainability reporting, which is creating complexity and confusion for companies and investors. [Baker R., Eccles R., & Serafeim G. (2020). “The Future of ESG is … Accounting,” Harvard Business Review,https://bit.ly/3If7mun]
Progress is being made on harmonization on several fronts:
- The European Commission has published a proposal for a Corporate Sustainability Reporting Directive (CSRD 2021/0104). (See M. Lynn and S. Oryszczuk, “The EU Corporate Sustainability Reporting Directive Proposal: What Companies Need to Know,” Inside Energy & Environment, May 18, 2021, https://bit.ly/3RmLYYj.) Responding to the demand for stronger and wider sustainability reporting standards, the Corporate Sustainability Reporting Directive (CSRD) mandates sustainability reporting and assurance through the amendment of existing EU laws, including the Transparency Directive, the Accounting Directive, and the Audit Directive. The goal is for sustainability reporting to be on par with traditional financial reporting. In 2022, “The Council and European Parliament today reached a provisional political agreement on the [CSRD]. The proposal aims to address shortcomings in the existing rules on disclosure of nonfinancial information, which was of insufficient quality to allow it to be properly taken into account by investors. Such shortcomings hinder the transition to a sustainable economy” (“New rules on corporate sustainability reporting: provisional political agreement between the Council and the European Parliament,” https://bit.ly/3ObpYMU).
- In 2021, the SASB and the IIRC announced they would form a combined entity named The Value Foundation. Their respective standards and frameworks are recommended as a combined ESG reporting approach, which is anticipated to form the basis of the guidance to be issued by the newly formed International Sustainability Standards Board. The 2020 co-publication by the Global Reporting Initiative (GRI), SASB, Carbon Disclosure Project (CDP), Climate Disclosure Standards Board (CDSB), and Task Force on Climate-Related Financial Disclosures (TFCD) presents a shared vision for comprehensive ESG reporting.
Additional issues also challenge the veracity and preparation of such reports:
- Sustainability reports are often separate and distinct from traditional financial statements and disclosure reports (e.g., SEC Form 10-K). This creates difficulty in seeing the relationships between traditional financial performance and ESG performance.
- Sustainability performance measures are heavily weighted towards qualitative or nonfinancial measures. Qualitative measures are generally more challenging to capture, measure, and report.
- Sustainability performance data may reside in disparate systems and data sources that exist within and outside of the enterprise. This paradigm creates challenges to locating, accessing, and confirming completeness and accuracy.
- It may be a challenge to access the specialized expertise (e.g., legal, scientific) needed to assess, measure, and report complex ESG-impact and outcomes such as climate change, human rights, and greenhouse gas (GHG) emissions.
- Organizations face competing priorities—managing profit margins in a paradigm of increasing costs, supply chain constraints, and hiring and retention amidst the “great resignation.”
- ESG-washing (e.g., ‘greenwashing,’ social washing) questions and risks are associated with the veracity of ESG communication and reporting (e.g., false and overstated positive ESG claims, understating negative impacts).
- Since 2021, the SEC has been increasingly focused on proposing mandatory ESG disclosures in the near term. Such proposals include climate change, diversity, human resources, cybersecurity, and governance. It will be challenging for some organizations to be ready to meet new requirements.
ESG Assurance Services—A Matter of Trust
Growing expectations from stake-holders and influencers, including customers, employees, investors, NGOs, and regulators have led to widespread growth in ESG communications and reporting. At the same time, the sheer volume of nonuniform ESG jargon, standards, frameworks, and performance measures has led to confusion, complexity, and consternation over the lack of comparability and consistency in ESG reporting.
This rapidly evolving ESG communication paradigm has also led to skepticism and a lack of trust in the relevance, objectivity, credibility, and veracity of ESG assertions and claims. A case in point is the growing concerns over “greenwashing.” For example, a survey of investors by global investment management firm Schroeders reported the following:
Institutional investors view green-washing—where an organization presents itself as more environmentally friendly than it is—as their top concern as they try to integrate ESG factors into investment decisions, according to a new survey (https://bit.ly/3uwONfD).
Growing concerns over greenwashing, as well as “social and sustainability–washing” are driving demands from regulators, NGOs, and stakeholders for independent assurance of ESG communications and reports.
The AICPA defines independent ESG assurance as a CPA obtaining “either reasonable or limited assurance about the accuracy and reliability of the sustainability information and then based on the assurance obtained either expresses an opinion or a conclusion” (https://bit.ly/3yMPTGj). Such assurance services may also extend to the processes, systems, and controls over ESG reporting.
The processes for delivering independent accountant assurance services on ESG reporting are transforming internationally. For example, in the United States, changes have been made to AICPA Statements on Standards for Attestation Engagements (SSAE) to address the unique needs of attestation engagements performed by CPAs, including those covering sustainability information. Exhibit 6 provides examples of assurance services supported by SSAE 21.
Examples of AICPA Assurance Services Supported by SSAE 21
Another example is ESG assurance services promulgated by the International Auditing and Assurance Standards Board (IAASB). Such services are in the domain of extended external reporting (EER). EERs are posited by the IAASB as an extension of traditional external financial reports. According to IAASB, EER assurance “is used to describe engagements to provide assurance on different forms of non-financial reporting, including sustainability reporting” (https://bit.ly/3P7kzHK). Exhibit 7 presents an overview of the IAASB’s EER assurance services.
Overview of IAASB Extended External Reporting (EER) Assurance Services
Other examples promoting assurance of ESG reporting have emerged. For example, EU Directive 2014/95/EU, on nonfinancial and diversity information, gave each EU member state the authority to define whether independent assurance services are required for compliance; the European Commission has published a proposal for a Corporate Sustainability Reporting Directive (CSRD, 2021/0104), which includes independent assurance requirements.
To Be or Not to B Corp
In addition to public accounting services, a range of third-party ESG-related services are available to SMEs. One such resource that is rapidly growing in popularity globally is B Lab, a U.S.-based not-for-profit organization founded in 2006. Its founding vision was rooted in helping organizations understand, assess, and communicate an organization’s ESG impact and create long-term value for all stakeholders, not just shareholders/owners.
B Lab is best known internationally for assisting organizations with achieving “B Corp” status through a B Lab certification process. Certified B Corps meet B Lab’s standards of ESG performance. The B Lab website defines B Corps as follows:
B Corp Certification is a designation that a business is meeting high standards of verified performance, accountability, and transparency on factors from employee benefits and charitable giving to supply chain practices and input materials (https://bit.ly/3Ay47MF).
Organizations must meet the following three categories of requirements to achieve B Corp Certification: 1) measure impact (i.e., performance), 2) legal accountability, and 3) verification and public transparency.
Overview of the B Corp Certification Process
The first step is meeting the B Corp performance requirement. The B Lab standards for ESG performance are embedded in an online B impact assessment, an ESG self-assessment performed by the organization applying for B Corp certification (https://bit.ly/3uwMXLu). Accessible free of charge, the B impact assessment is a confidential measurement and management platform designed to assess how an organization’s operations and business models impact ESG.
The B impact assessment contains diagnostic questions associated with ESG impacts. For example, a question in the governance domain is: “What percentage of management has their performance evaluated formally on meeting environmental and social outcome targets?” The assessment covers the most recent fiscal year. For companies with less than one year of operations, a “Pending” B Corp status level is available. The results of the B Lab Assessment are evaluated and verified by B Lab. Organizations receiving a score of 80 points or higher meet the performance requirement for achieving B Corp certification.
The second step is meeting the B Corp legal requirement. B Corps are legally required to consider the impact of their decisions on all of their stake-holders. This requirement may be satisfied through a range of governance structures, such as LLCs, corporations, and cooperatives. B Lab provides guidance and tools to assist with this requirement.
The third step is meeting the B Corp transparency requirement. According to B Lab, “All Certified B Corps share their B Impact Assessment overall scores and category scores on their public profiles on B Lab Global’s website.” (https://bit.ly/3OTf2Vs). Additional disclosures may be required depending on the unique circumstances of the organization (e.g., public companies have additional transparency requirements).
B Lab and GRI Collaboration
B Lab and the GRI are collaborating on ESG-impact management and reporting to facilitate a more holistic approach. The B Impact Assessment facilitates performance management and evaluation of an organization’s positive and negative contributions toward the goal of sustainable development. The GRI standards facilitate ESG reporting in a balanced and reasonable representation of an organization’s positive and negative contributions towards the goal of sustainable development.
Both B Lab and GRI enable organizations to assess, improve and share ESG impact and outcome information. Combining both frameworks creates a more holistic approach to sustainability reporting and impact management.
Differences between Certified B Corps and Benefit Corporations
Some confusion exists over the differences between a Certified B Corporation and a Benefit Corporation. Although each one represents a separate and distinct classification, they do share some common characteristics. (See “SoCap Digital, What’s the Difference between a B Corp and a Benefit Corporation?,” https://bit.ly/3IogMUn.)
A B Corp can be any type of for-profit legal entity that meets the B Lab standards of verified performance, accountability, and transparency on factors ranging from employee benefits and charitable giving to supply chain practices. A Benefit Corporation is a legal structure applied to for-profit corporations. A Benefit Corporation is obligated to, in addition to creating value for its shareholders, meet three additional legal requirements (that differ by jurisdiction): 1) Purpose—it must provide material positive impacts on society and the environment as a whole; 2) Accountability—it must conduct an annual assessment of its social and environmental performance using an independent third-party assessment standard or framework; 3) Transparency—it must report its social and environmental impact to shareholders and the public in an annual benefit report.
Although any for-profit company can become a Certified B Corp, Benefit Corporation status is available only in designated jurisdictions (e.g., specific U.S. states, Ecuador, Italy, Rwanda) with existing legislation that recognizes Benefit Corporations.
For both B Corp and Benefit Corporation status, an organization must conduct a self-assessment that assesses the positive material impacts created by its operations and business model. For Certified B Corps, this is done using the B-Lab’s B Impact Assessment tool, which varies by company size, sector, and market. For Benefit Corporations, depending upon the jurisdiction, different standards or frameworks will be considered acceptable for performing the self-assessment.
To achieve Certified B Corp status, an assessment with a minimum score of 80 is required. This assessment must be verified and certified by B Lab. Recertification is required every three years. Certified Benefit Corp Status, however, is self-reported, with no independent verification, although third-party attestation of the assessment may be required in some jurisdictions.
Certified B Corps are legally required to adopt a corporate governance structure accountable to all stakeholders, including stockholders, and achieve benefit corporation status if available in their jurisdiction. Benefit Corporations are legally required to consider the impact of their decisions on all their stakeholders. They must adopt the mandatory legal framework applicable to their jurisdiction. A Benefit Corporation’s mission must be part of the organization’s statutes or bylaws; it must expand administrators’ and managers’ fiduciary duty to take into account the interests of all stakeholders.
For both Certified B Corps and Benefit Corporations, the board of directors and management are accountable for considering the ESG impact of its operations and business model on all stakeholders. Benefit Corporations may also face accountability requirements that vary by jurisdiction. Both entities must report social and environmental impact assessment results using a third-party assessment standard. The cost for Certified B Corp status varies based on revenue base, ranging from an estimated $500-$50,000 annually. The filing fees for Benefit Corporation status vary by jurisdiction.
B Corp Case Study—Greyston Bakery, New York
A leader in the conscious capitalism or stakeholder capitalism movement, Greyston has become synonymous with the term “social enterprise” via its work to promote a more inclusive economy, one person and one job at a time. Greyston Bakery brownies have been featured in numerous Ben & Jerry’s ice cream flavors and sold at Whole Foods Markets. That purchase furthers the organization’s mission to provide hope to a population of talented, yet unemployed individuals who are looking for that opportunity to work.
Since 1982, Greyston has pioneered the Open Hiring staffing model, whereby individuals seeking employment may stop by Greyston’s manufacturing facility in Yonkers, N.Y., to put their name on a job list; alternatively, they may register online (https://www.greyston.org/openhiringjobs/). When a job becomes available, the next person on the list gets it—no interviews, no background checks. In addition to being an innovative employment process disruptor, Greyston Bakery was also the first social enterprise in New York to register as a Benefit Corporation, in February 2012. Greyston also became a certified B Lab in 2015, rated in the top 10% of B Corps worldwide.
Greyston is now ramping up its efforts to position itself as a vital resource that goes beyond providing jobs and changing lives through comprehensive workforce development services and workplace innovations—all in the spirit of creating a more inclusive economy. The problem statement that Greyston wants to tackle is the 10 million Americans who face at least one of the major barriers to employment (criminal background, mental illness, substance recovery, or homelessness). At least 60% of the formerly incarcerated adults are unemployed at least one year after release, and 27% are unemployed in general.
One of Greyston’s solutions to this problem is its Open Hiring staffing model that employs approximately 80 individuals a year at Greyston Bakery, offering the opportunity for real economic stability through training, fair wages, and benefits. Greyston Foundation, which is the not-for-profit parent company of Greyston Bakery, offers workforce development and job skills training in emerging fields where participants receive nationally recognized credentials and job development support. The foundation also works with other employers to replicate Open Hiring in other industries and local contexts.
As a Benefit Corporation, particularly from a governance standpoint, Greyston adheres to a higher standard of accountability and transparency, and corporate purpose, especially in the areas of social, environmental, and finance. In terms of organizational governance, the two boards of Greyston Bakery and Greyston Foundation meet on a quarterly basis to review the financial and business performance of each entity, and also to review key performance indicators (KPI) that measure Greyston’s broader impact from a stakeholder perspective.
Andrew Kassoy, cofounder and CEO of B Lab, says that the governance structure “entrenches purpose” in its practices and procedures (“Declaration of interdependence: B Lab Global’s Andrew Kassoy,” McKinsey & Company, September 30, 2020, https://mck.co/3ypWhCe). This also creates value over the long term to the benefit of employees, the Yonkers community, and other key stakeholders.
As an example of what gets reported to the Greyston boards, the organization calculated that it generated approximately $14 million in positive economic impact in southwest Yonkers in 2021, created in large part by its Open Hiring employees, 80% of whom reside in the area. This includes the compensation received by Open Hiring employees and the public assistance and other government savings generated. Moreover, Greyston’s contributions specifically have helped to meet the combined financial, social, and human needs of the local community and beyond. Exhibit 8 presents examples of such contributions.
Examples of Greyston’s Community Contributions
According to Joseph Kenner, president and CEO of Greyston, “Since 1982, we’ve been working to shift the collective consciousness around hiring practices, and our impact numbers prove that offering jobs and support to marginalized individuals, is good for business and society. Our goal now is to get other companies to do it too; we don’t want to be unique anymore.”
With respect to filling the millions of job openings across the country, Kenner said: “Open Hiring would put a serious dent in that gigantic number … Companies that do this will find, in short order, that those individuals hired after they experienced repeated rejection in their job searches turn out to be the most loyal of employees; they will stay with companies much longer than employees who don’t have the same level of loyalty.”
B Corp Case Study—El Ordeño, Ecuador
El Ordeño is a small-business dairy farm in Ecuador. Certified as a B Corp since 2019, the B Lab website describes the company as follows:
It was mid-July 2020, while the world was paralyzed by the outbreak of the COVID-19 pandemic when El Ordeño CEO Juan Pablo Grijalva confronted a tough decision. The pandemic was having a significant impact on the company’s sales and on its stakeholders. Many organizations opted for austerity; that is, to adjust their strategy and radically cut costs. For companies with limited cash reserves and limited or no access to funding, cost-cutting needed to be substantial and rapid. Consequently, employee compensation and vendor contracts were top-of-the-list cuts. The path followed by El Ordeño, however, was radically different—as informed by their “responsible-business purpose” strategy.
Top management, supported by the board, decided that the company would continue to buy from its suppliers, in spite of negatively impacting the company’s resources and net worth. They decided that maintaining the trust built between the company and its more than 6,000 small suppliers, as well as ensuring stability for their workforce, was more valuable than short-term performance.
How did El Ordeño manage to do this? By deploying a fair and sustainable procurement policy in favor of the greatest needs within its supply chain. This was posited as a strategic and moral decision, one that was informed by its B Corp business model. This integrated ESG purpose recognized the importance of caring for their key stakeholders (e.g., suppliers) in such a time of need.
How did El Ordeño learn about this integrated business purpose? Prior to the pandemic, in 2019, El Ordeño became the first Certified B Corp in the dairy industry in Latin America. As a Certified B Corp, the company’s purpose embraces a binding commitment to act responsibly with its stakeholders by extending its fiduciary duty to consider the impact of its decisions on its stakeholders. According to El Ordeño CEO Juan Pablo Grijalva Cobo:
Business is a means to fulfill the things in which we believe. We believe that a change is necessary to rescue Ecuador. We cannot talk about the welfare of the company or the protection of nature when the people who depend on it are having a hard time thriving. As a B Corp, we have the obligation to guard people’s well-being, promote healthy and nutritious food, provide decent jobs and create the right environment for the company’s purpose to thrive (source: conversation with the author).
As a result, El Ordeño’s pandemic response was centered on deploying a fair and sustainable procurement policy in favor of the most-needed stakeholders, its workers, and supply chain vendors.
Beyond the pandemic, achieving B Corp status is considered by the El Ordeño leadership as informing a sustainable long-term value purpose that encompasses “People, Planet, and Profit.” In addition, in response to the growing demand for greater ESG transparency, El Ordeño uses the B Corp Impact Report and GRI framework as a basis for preparing its ESG-impact communications and reporting. This allows the company to meet the accountability expectations of its stakeholders while building long-term trust and legitimacy. El Ordeño also strives to inspire others by demonstrating their tangible impacts through a responsible business purpose.
A mandate of sorts is driving the ESG movement. SMEs are playing a crucial and unique role in the international ESG movement. Although challenges exist, substantial opportunities are available to SMEs that embrace an integrated ESG business purpose.
To achieve and optimize such ESG opportunities while mitigating the associated risks requires a business-wide commitment and integrated strategy. Many resources are available to assist SMEs with strategy design, deployment, and trusted reporting. For example, there are organizations (e.g., B Lab, CPA firms, NGOs) that can help and frameworks and standards to serve as a reference. Customizing such resources to the unique attributes and priorities of an individual SME is crucial to optimizing ESG opportunities and mitigating risks.