How many of your clients actually need ESG support?

ESG is all the rage in boardrooms. 87% of C-suite executives believe that ESG initiatives are important for the future of their organisation, according to a 2023 Ernst and Young survey of Fortune 1000 companies.

This is not just a matter of compliance, as a wide variety of corporations – including the likes of Raytheon, Coca-Cola, and Allianz – have recognised that ESG is a valuable tool for driving growth, cutting costs, and facilitating strategic planning.

Despite this increasing trend, many SMEs are still sceptical. They either lack the time and knowledge to implement a sustainability strategy, or, worse, view ESG as nothing more than a tick-box exercise.

However, due to increasing EU regulation and consumer demand, SMEs cannot ignore ESG anymore – and it’s up to their accountants to help them realise this fact and address this challenge.

How Many UK Companies Need an ESG Strategy?

The short answer is all of them.

In response to rising pressure from customers, investors, stakeholders and their wider value chain, even the smallest businesses are now required to show some level of ESG awareness.

However, whilst most businesses would benefit from establishing their own sustainability strategy, it’s not an urgent concern for many of them – at least, not yet…

Instead, let’s focus on the UK businesses that will be affected by expanding EU sustainability regulations, starting in January 2025.

Large companies are already addressing these issues with consultants and significant in-house resources. But what about everyone else?

The Smaller Company Landscape in the UK

There are 5.5M SMEs in the UK.

However, some of these companies are too small to urgently need dedicated ESG support, or large enough that they can employ their own sustainability officer.

So, by excluding:

• Businesses not registered for PAYE or VAT
• Sole traders or micro businesses with fewer than 2 employees
• Companies that employ more than 250 employees

The addressable market is reduced to 1.36 million SMEs that would really benefit from external ESG support.

Of these 1.36m SMEs, around 236,000 trade directly into the EU, and a further 240,000 are indirect exporters, meaning that they form part of a value chain that will be affected by changing regulations.

The closer a business is to an exporting activity, the more likely it will need to disclose sustainability information, either as a result of customer due diligence, or for regulatory purposes.

This leaves 476,000 UK SMEs in a state of elevated risk: expanding regulations mean they will need a fleshed-out ESG plan from January 2025, but they likely lack the capacity to create this strategy in-house.

For a more detailed breakdown of ESG in the UK SME landscape, download The Disruption House’s full report by visiting our website.

What can ESG do for Smaller Businesses?

For those that are part of a value chain that links them to the EU, an ESG strategy will be crucial for complying with changing legislation.

Increasingly, UK businesses are finding that existing and prospective European clients are choosing suppliers that demonstrate a sustainable platform over those that do not.

Analysis by The Disruption House, using estimates provided by the Centre for European Policy Studies (CEPS), suggests that it can cost between £25,000 to £70,000 for an SME to meet required sustainability supply chain standards.

By establishing a sustainability strategy early, these businesses can get ahead of the competition, cutting back on any unexpected costs and getting regulation-ready well ahead of time.

In addition, creating a sustainability strategy can also enhance a company’s resilience in the long term, making it easier to avoid the reputational risk of greenwashing, and to attract ESG-aware customers, employees and investors.

What Does this Mean for Accountants?

Whilst accountants can reap the rewards of a sustainability strategy like any other business, they are also uniquely positioned to support their clients through the ESG process.

ESG as a service offers accountants a new way to engage with their clientbase and generate new revenue streams. Sustainability assurance complements existing accountancy validation and audit processes, whilst also enabling accountants to put their clients on the road to sustainable success.

Here at the Disruption House, we have already partnered with a number of accountancy firms – including Ecovis Wingrave Yeats, BluSky and haysmacintyre – to bring their clients the ESG expertise they need.

If you would like to learn more about The Disruption House’s accountancy partnership programme, please get in touch with the team by visiting our website.