Why Should Small Businesses Care About ESG?

ESG helps businesses focus on their environmental, social, and governance principles to assess their impact on the world around them. Integrating ESG principles into your business strategy can help improve financial performance, support your people and reduce your company's environmental impact.

Investors increasingly make investment decisions based on a company's mission and ESG practices, meaning adopting an ESG strategy can help small businesses attract vital funds.

Three main ESG factors operate together, but each has a separate focus.

The environmental pillar

As you may expect from the name, the environmental factor considers a business's impact on environmental factors such as climate change, carbon emissions, energy use and waste management. ESG principles encourage recycling, increased energy efficiency, and switching to renewable energy sources. ESG compliance looks at internal factors, such as energy usage in your premises, and external factors like your supply chains.

The social pillar

The social pillar concerns ESG factors involving people, whether employees, customers, suppliers or the wider society. The social pillar has human rights and equality at its heart, influencing your approach to diversity, equity and inclusion.

Essentially, it means treating people fairly. This can take various forms, from working to ensure equal pay and equality of opportunity, to product safety, supporting local communities or having a positive impact on society in general.

The governance pillar

Governance factors are vital to successful ESG performance as they underpin your approach to ESG. If there's a lack of ESG buy-in from senior leaders and managers, the policies and measures you create may lack the necessary detail to be effective. If your ESG efforts also involve business change, leading by example is the best way to get employees, customers and suppliers on board.

Effective ESG integration must include suitable policies, clear ESG metrics and monitoring to avoid governance issues.

The ESG factors we've described so far sound like they'd be at home in a corporation with the time and money to invest in a dedicated environmental, social, and governance team. Ensuring you have the right leadership to develop a business strategy that follows ESG principles is a plus. You might also wonder whether adopting ESG practices is worthwhile for small businesses.

ESG factors can help you improve financial performance, reduce energy bills, streamline supply chains, and retain employees. Your ESG efforts can also make your staff feel more valued, improving productivity. Environmental issues are increasingly important to customers and job seekers, meaning your ESG strategy can help attract new clients and high-quality staff. Small businesses typically have fewer employees and tighter financial margins, meaning modest changes can make a significant difference.

An ESG strategy typically impacts the whole business. Investing time is vital, and it's worth setting up a dedicated ESG team if possible. Adopting ESG practices is an ongoing process. Here are some initial steps to support your ESG efforts.

Review existing provisions and metrics

When developing an ESG business strategy, data collection is your friend. It helps you identify financial performance issues and problems in the workforce, as well as consider your brand's reputation. The process should include detailed assessments of your current policies, such as diversity, equity and inclusion (DEI) and gender pay gap data. You should also examine the figures for your energy consumption, sickness absence, supply chain spending, and any other metrics that will give you a clear picture of your current performance to accurately assess your ESG performance going forward.

We also recommend reviewing your employee benefits to see whether they provide effective support.

Determine your metrics

Time and money are typically limited in a small business, meaning prioritising key areas for improvement is vital. You may adopt more ESG principles over time, but start by using the results of your initial review to decide where to focus first. For example, if you have high staff turnover or sickness absence, a good starting point could be employee well-being, within the social pillar. Identify the metrics that let you monitor progress. In this case, sickness absence rates are an obvious choice, but you could also examine anonymised data from your health insurer if they provide employee health assessments. 

Monitoring ESG metrics regularly ensures you identify whether changes have a negative or positive impact and adjust accordingly.

Talk to your team and suppliers

Your review will provide helpful information to help you adopt an effective environmental, social, and governance strategy. Consulting your team, suppliers, and customers offers information on less tangible principles, such as your reputation and employees' job satisfaction. Using conversations, staff forums, and surveys lets stakeholders feel included and can also help ensure employees are on board during any change process.

Your employee benefits package can demonstrate your commitment to your team's well-being and sustainability efforts. Here are a few ways to link your employee benefits to your ESG practices.

Environmentally-conscious travel

ESG sustainability practices should include consideration of your carbon emissions, energy use and transport strategy. You can also encourage your employees to travel in a more environmentally friendly way by offering sustainable travel options as an employee benefit.

The main schemes are typically available via salary sacrifice, meaning employees' salaries are reduced and they only pay income tax on the lower figure. They can also choose options that suit their circumstances and tailor their employee benefits to their needs. If you choose to implement any form of salary sacrifice, ensure your employees can access professional advice to consider the financial and tax implications.

Cycle-to-work schemes

Cycling to work can be a great option for employees who live a short distance from work and don't need to carry tools or equipment with them. A bike has a zero carbon footprint and doesn't need fuel or incur parking charges, so it can save your staff money.

The Cycle-to-Work scheme lets employees pay for a new bike via salary sacrifice, which they can use during their commute and personal life.

Public transport loans

Measures to make using public transport more affordable can help encourage employees to switch from their cars to the train or bus when travelling to work. Annual season tickets typically cost less per journey than single or return tickets. However, the initial outlay can be costly. An interest-free loan can help staff spread the cost of their season ticket across the year and make it more affordable, while also supporting your environmental goals.

Electric car loans

For some staff, cycling or using public transport isn't a viable option, depending on the nature of their work or whether they have a fixed location. While HMRC treats petrol or diesel vehicles bought using salary sacrifice as a benefit-in-kind, this doesn't apply to ultra-low emission vehicles (ULEV) such as electric cars or vans.

Allowing staff who need a vehicle to buy a ULEV via salary sacrifice means lower running costs and reduced carbon emissions in line with your environmental ESG goals.

Workplace pensions

All UK employers must provide eligible employees with a workplace pension and pay employers' contributions to the fund at a minimum of 3%. Increasing your contribution or offering to match employee contributions up to a specified limit helps your employees plan for the future. It can form part of the social pillar of your ESG strategy by supporting their financial well-being.

Some pension providers also offer investments that aim to promote sustainability or avoid investing in funds that may contribute to climate change. These funds are well worth considering as part of your environmental strategy.

Support for parents

High-quality social support could include help for working parents. There are various ways to offer this, including enhanced parental leave and pay, additional annual leave, flexible working, and help with childcare costs.

The Workplace Nursery Scheme can reduce employees' childcare costs. It operates via salary sacrifice and requires a payment from employers wishing to join. Alternatively, eligible parents can apply for tax-free childcare or join the Holiday Activities and Food Scheme without needing a contribution from their employer.

Employee well-being

The social pillar of any ESG strategy focuses on taking care of your people, meaning investing in employee well-being can go a long way to help you achieve your goals. Employee well-being starts with a positive company culture, but here are a few practical ways to offer support.

Health insurance

Employee health insurance provides quick access to private medical treatment and a broad range of health and well-being services, from 24/7 virtual GP appointments and self-help resources to employee health checks and discounted gym memberships. Health insurers provide policies designed for businesses with fewer than 250 employees, and you can select coverage that meets your needs and budget.

It can be worth having even if your business has fewer than five employees.

Mental health support

Mental health support is a highly valued employee benefit, reflecting increasing awareness of the importance of mental well-being. In 2024, approximately 10% of adults in the UK took time off work due to a mental health issue. It's estimated that work-related mental health issues cost the UK economy £57.4 billion last year, which makes a strong argument for good quality mental health support as part of your business strategy.

Depending on your chosen coverage, business health insurance can provide mental health support from a short course of counselling to psychiatric treatment. Employee Assistance Programmes (EAPs) also offer counselling and telephone guidance for financial, legal and health issues. Most policies offer EAPs as an optional extra, or you can choose a standalone service.

Well-being initiatives

Well-being initiatives take a company-wide approach to improving employee health. You can focus on initiatives focusing on physical health, for example, by encouraging desk-based workers to walk more. They're a great way to tackle common health concerns in your industry or issues causing high levels of sickness absence.

Initiatives can also support mental health or financial well-being.

Financial well-being

Financial stress can negatively impact employee well-being, leading to other mental and physical health issues. You can offer an employee discount scheme using a standalone provider or via your employee health or life insurance to help your team save money.

If an employee falls ill, benefits such as enhanced sick pay, supported by income protection insurance, and critical illness cover can help relieve financial stress during an absence from work.

Flexible working arrangements

Flexible working supports employee well-being by helping them improve their work-life balance and reduce stress. Flexible working arrangements can include changing an employee's working hours or location, either full-time or using a hybrid approach.

You can offer flexible working in a way that fits your working practices and supports your business goals, and tailor it to suit each employee's needs.

We hope we’ve given you food for thought on how an ESG strategy can benefit your small business. If you’d like to explore how insurance can provide employee benefits that support your ESG strategy, contact us for a comparison quote. We provide tailored advice and guidance to help you find the right health insurance coverage for your business.