Environment, Sustainability and Governance (ESG)-certified Business Hubs to Support Continual Innovations within the Small Business Community in the Post Covid-19 Era

By: Zeng Han Jun

Key Takeaways

  • Growing interest in Environmental, Social and Governance (ESG) issues and the opportunity to shape corporate behaviour as evidenced by the increasing number of ESG frameworks; 
  • Businesses are also progressively aware of the importance of ESG standards because of how it could affect investments and cost of financing; 
  • Private sector does not operate in silo because many business processes are highly dependent on the larger ecosystem;  
  • Studies have shown that new business regulations might reduce the number of smaller businesses. Smaller businesses have advantages in innovating;
  • Creation of an ESG-certified business hub that already meets most of the ESG criteria. Bankers and financiers work with hub councils to allow pre-approvals for loans to businesses that have decided to set up operations in these ESG-certified business hubs;
  • Pre-approvals could also be worked out for other types of debts or capital that require adherence to ESG standards; and
  • This concept could help to drive up rental occupancy.

Overview

There is no denying that the Arctic ice cover has reduced drastically over the past 20 years (Johannessen, Miles, Olsen, Bengtsson & Myrmehl, 2003) and research has shown that there are strong correlations between the changing ice cover, global weather ecosystem and environmental impacts (Vihma, 2014). Given the potential environmental impacts, international organisations and governments around the world are stepping up to improve the awareness of sustainability and actively engaging the business community to include ESG criterias as integral parts of their business operations. Regretfully, many consumers are still having short-term focus on self-related benefits (Tasci, 2017) therefore more effort certainly is needed moving forward to improve awareness. 

Multitudes of ESG Frameworks

While international organisations and governments are busy at organising awareness programmes, many are also busy at developing new ESG frameworks in the hope of guiding companies along the sustainability path. According to an interview that was given by PWC Malaysia, their team had counted over 300 different frameworks, guidelines and standards on sustainability, and over 700 indicators (Ng, 2020). The explosion in the development of ESG frameworks can certainly dazzle even the most experienced buffet consumer. 

The competition among the ESG frameworks are intense, each vying for market share and trying to extend coverage beyond existing markets. It is almost impossible to predict if there will be a single ESG standard or several dominant ones, but it is clear that market sentiments are changing and ESG issues are increasingly relevant to businesses. In a recent survey that was conducted by Mckinsey, it showed that almost 75% of institutional investors wanted a single sustainability standard, with 85% saying this is needed to be able to allocate capital more effectively (Bernow, Godsall, Klempner, & Merten, 2019). This is why ESG issues are increasingly becoming more relevant to businesses. Businesses are increasingly being judged by how they handle ESG issues and this affects their ability to attract investments and their cost of financing (Raimo, Caragnano, Zito,Vitolla & Mariani, 2021).

New Business Reporting Standards Affect How Firms Organise Themselves

Businesses do not work in silo by themselves. Instead, their business decisions and operations depend to a large extent on the larger ecosystem where they have chosen to site in. Many studies have increasingly concluded that businesses and governments are closely linked therefore, close collaboration between the two parties could help to accelerate growth (Schneider, Evans, Silva, Chandler, Amatori, & Hikino, 1998). Strict adherence to ESG standards requirements is a matter of time and as with all types of regulations, it increases the cost of doing business. Some studies have suggested that regulations are fixed costs therefore businesses that are employing more than five to nine employees, tend to expand their businesses with the level of regulation. The number of businesses that are employing one to four employees, are likely to decrease with the level of regulation ( Calcagno & Sobel, 2013).

Different countries have different metrics to determine the size of businesses but most define a business size of one to four employees as that of small or micro businesses. Whether small businesses play an important part in innovation has been a subject of debate for many years and I am not going into that. However, it is clear that smaller businesses have the advantages in innovating. Smaller firms do not necessarily have the bureaucracy and silos challenges usually faced by larger firms, however; employees’ resistance to change and the mentality of “not invented here” would still be an issue regardless of firm’s size (Barham, Dabic, Daim, & Shifrer, 2020).

From this, we could deduce that there is the probability that the number of smaller firms would reduce when business reporting standards become more stringent. On the other hand, there is also the chance that the larger firms become even larger as they absorb more employees to tackle the new work that is generated by the new business reporting standards. Eventually, sources of innovations would spring more from the larger firms and this scenario does have some implications on the dynamics within the business environment. 

ESG-certified Business Hubs 

Clearly, a smaller firm would have less resources on hand and could face more challenges when trying to adhere to the new business reporting standards. This might affect their cost of doing business, raise the bar in attracting investments and increase their cost of financing/ debts. Investors, bankers and financiers will scrutinise these businesses, subjecting them to higher standards before releasing the much-needed funds. 

One idea is to create an ESG-certified business hub with high environmental and society standards already in place, for example:

  1. Substantial percentage of the electricity sources within the ESG-certified business hubs are derived from renewable energy; 
  2. Waste management systems within the ESG-certified business hubs encourage whole-of-system recycling efforts. Employees just have to follow disposal instructions to take part in recycling efforts; 
  3. High employment regulations that adheres closely to the society part of the ESG equation; 
  4. Low carbon emission and/ or carbon neutral technology housed within the ESG-certified business hubs that can be easily leverage by the businesses for their research and development (R&D) and business operations; 
  5. Electric charging stations that are evenly distributed within the ESG-certified business hub to facilitate the usage of private and public Electric Vehicles; 
  6. Risks mitigation measures are put in place within the ESG-certified business hub to reduce risks from climate risks and other types of foreseeable crisis; and
  7. Others

Businesses that choose to set up their operations in such ESG-certified business hubs, should automatically fulfil some criteria of the E and the S parts of the ESG standards. In fact, banks and financiers should also consider working with the business hub council to develop pre-approvals for loans to the businesses that had decided to set up their operations in the hub. Or at least fulfil some parts of the ESG checks that are required for the commercial loan so that businesses have less paperwork to deal with. This reduces the need for lengthy and complicated ESG checks. Pre-approvals or partial pre-approvals could also be adapted for other types of debt or capital that require compliance to some form of ESG standards. 

Such arrangements have several advantages. Firstly, businesses can focus more on their products and services, and on improving their management/ governance. Secondly, environmental and sustainability initiatives could enjoy economies of scales and hub councils might be able to charge a premium for top-of-the-line facility management. Thirdly, the hub council could make the environmental and sustainability data transparent, which could serve as a good information source for external auditors, bankers and financiers to continually allow for the pre-approved loan arrangements and also makes for good marketing as well, if the district is managed well. Lastly, this concept could help to drive up rental occupancy. Businesses that want to secure pre-approvals/ partial pre-approvals for their debts and capital, and be automatically certified for certain parts of ESG standards, will want to take up occupancy in this type of ESG-certified business hubs. 

Such arrangement does not only benefit the small and micro businesses. Larger companies understand how bureaucracy can stifle innovations and have resorted to creating smaller business entities to spearhead innovation initiatives. Such ESG-certified business hubs can also house the newly spinoff corporate entities so that they could benefit from the loan pre-approvals amongst other business benefits, and also entrench itself in the cradle of innovation and sustainability.

The concept can be adapted for use beyond a hub. It can also be adapted for use in a village, town, district, province, state or even the entire country. The idea is to create small achievable wins that edge the community or society towards bigger victories in the future.  

 

References

Barham, H., Dabic, M., Daim, T., & Shifrer, D. (2020). The role of management support for the implementation of open innovation practices in firms. Technology in Society, 63, 101282. doi:10.1016/j.techsoc.2020.101282

Bernow, S., Godsall, J., Klempner, B., & Merten, C. (2019, August 08). More than values: The value-based sustainability reporting that investors want. Retrieved from Calcagno, P. T., & Sobel, R. S. (2013). Regulatory costs on entrepreneurship and establishment employment size. Small Business Economics, 42(3), 541-559. doi:10.1007/s11187-013-9493-9

Innovation And Size Of Firm. (2012). The Economics of Industrial Innovation, 237-251. doi:10.4324/9780203357637-20

Johannessen, O. M., Miles, M. W., Olsen, A., Bengtsson, L., & Myrmehl, C. (2003). Arctic climate change—will the ice disappear this century? Elsevier Oceanography Series Building the European Capacity in Operational Oceanography, Proceedings of the Third International Conference on EuroGOOS, 490-496. doi:10.1016/s0422-9894(03)80077-6

Liberto, D. (2020, December 14). Small and Mid-size Enterprise (SME) Definition. Retrieved from Murray, S. (2021, May 14). Measuring what matters: The scramble to set standards for sustainable business. Retrieved from Ng, J. (2020, December 17). Cover Story: An alphabet soup of ESG standards. Retrieved from Raimo, N., Caragnano, A., Zito, M., Vitolla, F., & Mariani, M. (2021). Extending the benefits of ESG disclosure: The effect on the cost of debt financing. Corporate Social Responsibility and Environmental Management. doi:10.1002/csr.2134

Schneider, B. R., Evans, P., Silva, E., Chandler, A., Amatori, F., & Hikino, T. (1998). Elusive Synergy: Business-Government Relations and Development. Comparative Politics, 31(1), 101. doi:10.2307/422108

Tasci, A. D. (2017). Consumer demand for sustainability benchmarks in tourism and hospitality. Tourism Review, 72(4), 375-391. doi:10.1108/tr-05-2017-0087

Vihma, T. (2014). Effects of Arctic Sea Ice Decline on Weather and Climate: A Review. Surveys in Geophysics, 35(5), 1175-1214. doi:10.1007/s10712-014-9284-0

Copyright © 2021 Zeng Han-Jun. All Rights Reserved.

Comments are closed.

Log in