Summary:
ESG (Environmental, Social, Governance) investments offer small and medium-sized enterprises (SMEs) demonstrable economic benefits. But is ESG a serious business case? Yes, because sustainably oriented SMEs often achieve above-average sales growth and higher profit margins. At the same time, they strengthen their employer brand: companies with anchored ESG values are better able to retain their employees and attract talented specialists more easily. There are also positive effects on the capital market – sustainable companies tend to have better share and financial ratios.
So the ESG business case is working! Overall, ESG measures improve the company’s image and create trust among customers, which opens up new market opportunities. Although some critics note that ESG implementation is costly, the bottom line is that the economic benefits of a sustainable approach outweigh the costs.
Why ESG is becoming increasingly important for SMEs
Sustainability and ESG criteria are rapidly gaining in importance for SMEs and are increasingly being recognized: ESG is a real business case. According to a recent survey, 77% of SMEs consider sustainability to be a very relevant or relevant topic¹. The pressure is coming from many sides: New EU regulations such as the Corporate Sustainability Reporting Directive oblige large companies to produce sustainability reports and include the entire supply chain – which pushes ESG requirements onto SMEs 2. At the same time, around two thirds of investors ESG factors in their decisions2.
Customers also expect responsible action: Around half of consumers look at a provider’s sustainability performance when making a purchase3. Millennials and Generation Z demand even more – 80% of them believe that companies should do significantly more to protect the environment and they are willing to pay an average of 10% higher prices for sustainable products2.
For SMEs, this means that what used to be considered a “nice-to-have” has now become a business-critical factor. Those who ignore ESG principles risk competitive disadvantages and the loss of customers or orders to more sustainable competitors2. In short: ESG has advanced from a trend to a must-have – also and especially for SMEs.
Turnover and profit: ESG as a growth driver
Higher profitability through ESG
Numerous studies show that ESG investments improve the financial performance of companies. Companies that operate sustainably often achieve growth advantages and higher profitability. For example, pioneering SMEs show above-average sales and profitability in terms of sustainability compared to the rest of the industry.4
An analysis by Landesbank Baden-Württemberg found that sustainable companies in the consumer goods sector achieve an average EBIT margin that is 6 percentage points higher than that of less sustainable competitors.3
International meta-studies also confirm a predominantly positive correlation between good ESG performance and financial indicators – more than half of the studies see a positive influence on e.g. share price, return on equity (ROE) or return on assets (ROA), while negative effects were hardly ever identified.5
Increasing sales through sustainable brands
On the sales side, ESG initiatives open up new market opportunities: consumer goods giant Unilever reported that brands with a strong sustainability positioning grew 69% faster than the rest of the portfolio in 20186 – an indication that sustainable products are in particularly high demand among customers. At the same time, ESG measures promote innovation and efficiency. More environmentally friendly processes reduce costs, which directly increases profits. A McKinsey study found that resource-efficient companies (e.g. lower energy, water and material consumption per turnover) achieve significantly better financial results.7 The companies that implement sustainability most consistently are even among the most financially successful in their respective industries.7
In addition to savings – e.g. through energy efficiency or waste reduction – SMEs also benefit from better access to capital: sustainability pioneers are considered more creditworthy by banks and investors.2 According to an MSCI analysis, companies with top ESG ratings were able to obtain financing on the capital market at significantly lower rates on average (average interest rate ~6.8 % p.a.) than ESG laggards (7.9 %).8
Overall, investing in ESG not only increases social responsibility, but often also turnover and profits.
Employee retention: ESG as a success factor
An often underestimated economic benefit of ESG is its influence on employees. Particularly in times of skills shortages, employees are increasingly looking for a sense of purpose and values in the workplace. Sustainable business practices have a direct impact on employer branding and employee satisfaction. Surveys show that 67% of employees would prefer to work for a company that acts in an environmentally responsible manner; almost a third of job changers have already consciously accepted a lower salary in order to work for a more sustainable employer.9
Accordingly, ESG measures improve the recruitment and retention of talent. According to Gallup data, companies with strongly practiced values and a sustainability culture achieve significantly higher employee engagement rates (up to 70 % engaged employees).10 This is reflected in loyalty: companies that have firmly anchored ESG in their corporate values are able to retain 93 % of their employees10 – fluctuation and knowledge loss are drastically reduced. Employees identify more strongly with their employer if it assumes social responsibility. In sustainability-oriented companies, employees are over 15 times more likely to rate their company as “a great place to work “9 and are more proud of their contribution. Practical examples underpin this trend: SMEs that position themselves as sustainable employers report easier recruitment of skilled workers.4 The Swiss SMEs surveyed in a sustainability study emphasize that their pioneering role in ESG opens doors – it arouses interest among applicants and “facilitates the recruitment of urgently sought-after skilled workers”.4
In addition to attracting new talent, the motivation of existing employees also increases, as they experience their work as meaningful and future-oriented. Overall, ESG therefore acts as an important lever for employee retention and performance – a clear competitive advantage for SMEs on the labor market.
Stock market and company value: ESG measures have a positive impact
For listed or financed SMEs, ESG factors also play a role in capital market performance. Sustainability can have a positive impact on stock market value and returns in the long term. Research during the COVID-19 crisis in 2020 showed that shares in companies with a high ESG rating outperformed those with a poor sustainability record in almost every month.11 Sustainable index funds also performed robustly: according to one analysis, 11 out of 12 sustainable equity funds outperformed the S&P 500 index in 2020 – contrary to the often expressed concern that ESG would cost performance.12
In the long term, ESG flagship companies appear to generate at least equivalent, if not better, equity returns. What is most important here is actual sustainability performance: when companies invest seriously in ESG (rather than just reporting on it), they benefit from lower risks and often from a valuation premium from investors.5 A good ESG rating systematically reduces the business risk, which is rewarded by the market with a lower cost of capital – as mentioned above, ESG leaders pay less interest on average and have more favorable access to equity capital.8
Although not all SMEs are listed on the stock exchange, this effect is also indirectly worthwhile for private SMEs: banks and lenders are increasingly valuing sustainable business models more highly, which has an impact on company valuations or loan conditions, for example. The overall conclusion of many studies is: “Doing well by doing good ” – companies that operate sustainably achieve at least as good, and often even more robust, financial performance in the medium to long term than conventional companies.13 Most studies agree that ESG does not result in a yield disadvantage.13
Image and customer acquisition: why ESG investments pay off
Customers thank genuine commitment
SMEs benefit enormously from ESG investments in terms of brand perception and customer satisfaction. Sustainability strengthens a company’s public image and can contribute directly to customer acquisition and loyalty. Consumers trust companies that act in a credible, environmentally and socially responsible manner much more. According to a study, over 80% of young consumers (Gen Y/Z) expect companies to actively protect the environment2. Accordingly, they reward genuine commitment with loyalty: 72% of Germans prefer brands that take sustainable measures (according to the 2022 survey) – such values create differentiation from the competition. Through ESG, SMEs can sharpen their unique selling proposition and position themselves as a trustworthy brand. Practical examples show the impact on sales: seals and certifications (organic, fair trade, etc.) have been proven to increase sales figures, as they are seen as a sign of quality and trust.13 Conversely, sustainability shortcomings can significantly damage a company’s reputation – for example, if suppliers have socially unfair conditions (keyword Boohoo scandal, which caused a fashion SME to suffer massive reputational damage.6
ESG opens doors in marketing
Positive ESG performance, on the other hand, provides material for marketing and storytelling: a credibly sustainable brand gains press attention and recommendations more easily. ESG investments also make it possible to tap into new customer segments. More and more major customers are demanding proof of sustainability from their suppliers – those who can provide this will secure orders and strengthen customer relationships. In this way, a proactive ESG strategy opens doors to demanding B2B customer groups.4 Finally, a good ESG image also creates customer confidence in times of crisis: Companies with a proven track record of acting responsibly enjoy a leap of faith that pays off, for example, in customer loyalty during scandals or market downturns. In short, a sustainable image is worth its weight in gold for SMEs – it increases brand attractiveness, facilitates customer acquisition and promotes long-term customer loyalty in a market that increasingly values “green” values.
What critical voices say
Despite the many advantages, there are also arguments that question the economic benefits of ESG for SMEs.
ESG reporting improves transparency and enables a well-founded analysis of resource consumption, risks and business opportunities, which leads to efficiency gains and cost reductions. It therefore helps to optimize long-term strategic decisions and identify regulatory risks at an early stage.14 However, the initial costs and effort involved cannot be ignored. Small companies in particular face challenges when it comes to implementation and reporting: according to a study, around 75% of SMEs struggle with extensive ESG documentation and the resources required for this.
Investments in sustainability – such as for new technologies, external certifications or consulting – can put pressure on margins in the short term. Some economists therefore argue that ESG activities initially incur costs and that the financial benefits do not materialize immediately.15
Empirically, the link between sustainability and financial performance is not always immediately apparent: although a Spanish study of 538 SMEs found positive effects in all ESG sub-areas, the overall result was not clearly reflected in higher profits16 – in other words, SMEs sometimes find it more difficult than large companies to monetize ESG investments directly into profit .16
There is also a risk of greenwashing: if sustainability promises are not backed up by action, the hoped-for brand effect will not materialize. Critics note that ESG can degenerate into a mere buzzword if companies only pursue it superficially – in such cases, of course, there are no financial benefits.
Overall, the positive impact outweighs the negative according to research, but the criticism reminds us that ESG is not a sure-fire success: Only an authentic, strategically well-implemented commitment to sustainability will ultimately deliver the economic benefits.5 Companies must therefore be prepared to invest effort and cultural change in order to reap the rewards.
Conclusion: sustainability pays off in the long term
For SMEs, ESG is proving to be a future-proof strategy with high economic potential. The studies and practical examples listed prove that sustainable action is in no way at odds with business success – on the contrary. Companies that assume ecological and social responsibility improve their profitability, attract committed employees, score points with customers and reduce financial risks. Of course, implementation initially requires resources and a willingness to change.
However, ESG investments pay off in the long term: Sustainable SMEs are more resilient in crises, enjoy a trust bonus on the market and meet the growing demands of legislators, business partners and investors. In the face of climate change, shifting social values and new regulations, sustainability is becoming a decisive success factor for companies of all sizes. Thanks to their agility and innovative strength, SMEs in particular can benefit from early ESG positioning and secure competitive advantages.
In summary, sustainability pays off economically and strategically – SMEs that invest in ESG today are laying the foundations for tomorrow’s success. The motto is: “Doing well by doing good ” – those who do good also do well in business.
