A new report from Business Development Bank of Canada (BDC) suggests Canadian small- and medium-sized businesses that supply goods and services to large corporations can profit from adopting ESG criteria.

ESG in Your Business: The Edge You Need to Land Large Contracts, was written by the Montreal-headquartered Crown corporation, which supports small- to medium-sized enterprises (SMEs) with financing, capital and advisory services.

The study is based on two surveys: the first one was with 121 large companies or public-sector organizations that source from Canadian SMEs, and the second was conducted on 1,251 SMEs that supply large private- or public-sector contractors in Canada.

It found most of the large companies require their suppliers to disclose information about at least one ESG criterion, and that number is expected to climb further in the future. Three-fourths expect to increase the number of ESG criteria requirements as well. With more integration of ESG into procurement, SMEs will have to adapt to stay competitive, the study found.

Sandra Odendahl, the senior vice-president and head of sustainability and diversity at BDC, said the report shows following sustainability practices benefit SMEs.

“The data shows that companies that have adopted environmental standards and more broadly that report they have ESG standards in place are either as profitable or a bit more profitable than those that report that they haven’t,” she said.

What the report found

Sustainable procurement is defined in the study as “a process for acquiring goods and services that, in addition to reflecting quality and cost, also takes ESG criteria into account.”

On the environmental side (E) it could mean greenhouse gas emissions reduction practices or biodiversity improvement. For social criteria (S), it entails practices covering diversity, equity and inclusion. Governance (G) includes sustainable development policy, environment and social risk management.

BDC discovered 82 per cent of the 121 major buyers require their suppliers to meet at least one ESG criterion, with the figure anticipated to rise to 92 per cent by 2024.

However, the companies have different ESG requirements for procurement. Thirty-nine per cent require compliance with criteria related to all three ESG components; 20 per cent only cover environmental; 10 per cent solely governance; and eight per cent exclusively social. Seventy-five per cent plan to increase their sustainability requirements over the next five years.

Of the major buyers, more than 60 per cent requested ESG criteria information from their SME suppliers. The criteria ranged from reduced energy consumption (86 per cent) to as low as 19 per cent for promotion of sustainable commuting among employees. Having managers or employees from diverse backgrounds showed the most importance at 69 per cent for social criterion, while the most in-demand governance criteria was "procedures to manage environmental risks" at 70 per cent.

More than three-quarters of SME suppliers (76 per cent) consider it beneficial to adopt ESG practices. Entrepreneurs from the LGBTQ2+ community, people living with a disability, people under 45-years-old, members of a visible minority, immigrants and Indigenous people responded positively to ESG above the average.

How ESG criteria helps SMEs

The BDC report revealed that adopting ESG practices was not strongly correlated to profitability. It found 73 per cent of SMEs that have adopted ESG standards are profitable while 70 per cent per cent of SMEs who did not adopt ESG practices were also profitable. 

SMEs who adopted ESG practices were reported to have found opportunities in new markets, to have employees with a sense of belonging and more likelier to stay with the company (32 per cent), and to have greater access to financing and investment (31 per cent) than SME's who did not have an ESG approach.

BDC says the findings confirm a previous study that showed “the most environmentally proactive SMEs generate higher profit margins and experience greater sales growth than those that are less proactive.”

“The adoption of sustainability practices and or ESG standards has a positive effect . . . It is likely to generate new business opportunities and allow small companies to grow their volume,” Odendahl said.

While sustainable procurement is “a good thing” in the long run according to Odendahl, the report notes there is a cost to making changes. Acquiring ESG standards and certifications like EcoVadis or B Corp will take up money and time, which led 50 per cent of SME respondents to say implementing ESG standards increased operating costs and 36 per cent said it increased the administrative burden.

However, the costs of inaction is potentially losing a customer if a business does not mobilize quick enough on sustainability, Odendahl said, which means those certifications or using more sustainable packaging can be worth the commitment.

She also referenced a survey that showed one-third of millennial and Gen Z workers turned down a job due to a prospective employer’s misalignment with their sustainability values, showing the importance of ESG in retaining talent.

Though Odendahl said there is “no real one answer” as the benefits of sustainability depends on a business’ sector(s), its clients and what the employees believe.

Tips for incorporating ESG

BDC listed five ways for a company to initiate their sustainability program, including setting up a governance structure.

Another tip is to understand the company’s biggest sustainability issues. For SMEs that tend to lack the resources for extensive audits, consulting and verifying their results, Odendahl encourages them to critically examine the social issues associated with the company, identify the most pertinent areas relevant to the business sector and address matters like increasing revenue and reducing risk.

“You don’t have to start with things that are just good for the world, you can start with things that are good for the world and for your business as well.”