Insight
ESG: Why SMEs cannot afford to ignore it
January 2026
Unlike large, publicly traded companies in the UK, small and medium-sized businesses (SMEs) are not yet mandated to meet the same strict Environmental, Social, and Governance (ESG) reporting standards. But the key word here is ‘yet’.
Many SMEs fail to keep up with the rapidly changing regulatory landscape. Whether due to a belief that it does not concern them, or because they lack the capacity to implement ESG requirements, this inaction could lead to difficulties down the road when these regulations become mandatory.
Investing in ESG early, with gradual implementation, helps SMEs prepare and reduces the financial burden of building strong ESG credentials. Ignoring sustainable practices can hinder SME growth. Conversely, embracing ESG principles can attract investors, strengthen customer loyalty, foster closer supplier relationships, and establish SMEs as future focused, sustainable leaders in their industries.
Therefore, it is crucial for SMEs to consider the long term advantages of embracing not just sustainability for business, but a broader ESG strategy.
The strategic power of sustainability
Research by The Disruption House demonstrates that ESG disclosures go beyond mere regulatory compliance; they reveal a company’s values and long-term vision. These disclosures are strategic tools, communicating a commitment to sustainable growth to key stakeholders.
A significant majority of businesses (60%) report feeling stakeholder pressure to demonstrate their ESG credentials, fearing competitive disadvantage if they fail to do so. Companies that proactively engage in sustainability build stronger relationships with partners and customers who share these values, fostering trust and long-term loyalty. After all, a strong brand reputation is crucial for attracting customers, top talent and partners.
Larger suppliers, investors and partners subject to ESG regulations (e.g., the Corporate Sustainability Reporting Directive (CSRD)) are increasingly hesitant to work with companies that lack sustainability alignment. This reluctance stems from the risk of reputational damage or negative impacts on their own ESG reporting. Consequently, SMEs failing to meet sustainability standards may struggle to secure partnerships with larger businesses.
Stakeholder reluctance to associate with businesses that neglect sustainability presents a valuable opportunity for SMEs. A commitment to sustainability can become a unique selling point, setting an SME apart, especially as many SMEs are just beginning their sustainability journey.
Furthermore, research from Bain & Co. indicates that companies with low ESG scores are about twice as likely to default on loans compared to those with higher scores. This is because strong ESG performance often reflects operational efficiency, waste reduction, and greater financial stability.
Consequently, ESG is increasingly critical for banks in assessing credit risk. Higher ESG scores correlate with lower perceived risk, making SMEs committed to ESG more likely to secure credit and potentially benefit from lower interest rates.
The challenges of achieving ESG compliance
While striving for strong ESG performance, SMEs often encounter challenges. Limited budgets, expertise, and capacity can hinder the management of ESG initiatives. Furthermore, the absence of immediate legal pressure can make it difficult to prioritise sustainability over other pressing business needs.
The potentially high cost of compliance adds another layer of complexity. ESG assessments, audits, and certifications can strain already tight budgets. Upgrading materials, machinery, and other resources to meet ESG standards can also pose significant financial challenges for SMEs.
A lack of in-house sustainability and broader ESG expertise further complicates matters. Many SMEs cannot afford to hire dedicated sustainability specialists, making it difficult to develop and implement effective strategies. Without clear guidance on where to begin and how to measure impact, many SMEs feel overwhelmed and may delay or avoid action altogether.
Finally, limited human resources can make it challenging for SMEs to dedicate time and personnel to sustainability initiatives, which may be perceived as secondary to immediate profit-generating activities. This limited capacity can result in sustainability efforts being deprioritised.
Creating ESG excellence on a budget
Navigating ESG commitments can seem daunting, but SMEs can adopt strategies to make the process manageable and accessible. A comprehensive ESG approach is not always necessary initially. SMEs can start by prioritising the key areas most relevant to their operations and stakeholders. The focus should be on measurable and achievable actions, creating a tailored strategy.
Successful implementation requires careful assessment of the time, resources, and expertise required. A ‘Do-it-Yourself’ approach, while seemingly cost-effective, carries significant risks, including misallocated resources, lack of proper accreditation, potential reputational damage, and accusations of greenwashing. However, hiring expensive consultants or a full-time Sustainability Officer (CSO) is often impractical for SMEs. Instead, outsourcing or strategic partnerships can streamline operations and support ESG goals.
Sustainability-as-a-Service (SustAAS) offers an accessible and flexible solution. Through surveys and interviews SustAAS assesses, analyses, and guides businesses towards ESG excellence. By setting targets with leadership teams and providing periodic reviews, SustAAS offers an affordable alternative to traditional consultancy, helping SMEs meet ESG requirements without excessive cost.
Building your 2025 ESG strategy for sustainable success
Businesses of all sizes have a responsibility extending beyond regulatory compliance; contributing to the well-being of the planet, society, and employees. This commitment forms a solid foundation for long-term, sustainable success.
SMEs that proactively integrate ESG into their strategies will not only future-proof their operations, but also enhance their resilience and competitiveness in today’s dynamic environment. Conversely, those that overlook ESG risk being left behind.
Partnering with experienced ESG specialists offers a practical and cost-effective way to navigate this transition without the expense of in-house expertise. With the right support, SMEs can achieve sustainable growth, anticipate evolving industry demands, and emerge as market leaders.
About the author
Rupert Bull
London, United Kingdom
Rupert is the co-founder and Chief Executive Officer of The Disruption House and has over 25 years of FinTech experience within both large organisations (Reuters and Instinet) and start-ups.
He co-founded, built, and sold Expand Research, the leading Capital Markets benchmarking and research business, to The Boston Consulting Group (BCG) in 2011, before leaving to start The Disruption House in early 2015.