Survey reveals challenges faced by SMEs in meeting ESG demands

A report issued by MakeUK and Lloyds Bank has highlighted the problems encountered by companies, particularly SME’s, attempting to satisfy an increasing demand by their customers that they meet evolving environmental, social and governance (ESG) standards.  ESG transition plan disclosures are set to become mandatory for many UK companies later this year, and nearly 2/3 of companies say they expect to increase the scale of their ESG strategy in the next two years.

In the survey of 150 firms, more than three quarters of the SME’s reported receiving enhanced ESG requirements from their customers, but a half said they lacked the resources to meet them and only 27% said they received support from their clients. Only a slim majority of all the firms surveyed (55%) feel that it is clear what ESG conditions are required of them by their customers.

Since 2012 the number of firms having ESG requirements built in to their contracts has risen from 66% to 74%, with 94% of the largest firms  having ESG considerations as part of their procurement decision making process. Topics covered include health and safety, labour practices, CO2 emissions, waste management and biodiversity. While health and safety is currently seen as the most important, UK manufacturers expect CO2 and biodiversity to increase in significance in the near future.

As well as the lack of support, the report highlights the other main challenges to companies trying to meet their ESG requirements as the lack of consistent infrastructure for supply chain reporting. With many different methods, systems, and tools for data collection, the lack of a standardised approach increases the reporting burden for suppliers. Combined with lack of consistent standardised ESG metrics, these factors reduce transparency and the ability to benchmark across the sector.

Huw Howells, head of manufacturing & industrials at Lloyds Bank:

“The research has shown a significant shift change in the number of manufacturers that are focusing on social purposes and environmental factors, while managing competing priorities and day-to-day challenges.

“It’s particularly encouraging to see that larger companies are mostly in a good position in terms of formalised ESG strategies, corporate and supplier governance, and supplier management. However, these increasing requirements are creating financial and technological barriers for many firms and even more so for smaller firms in their supply chains. It’s therefore important for manufacturers to work with their supply chains to ensure that ESG strategies are a sustainable collective achievement and a force for future growth.