Firstly, let’s address the question of ESG. This is a term heard by many but understood by few. ESG, or Environmental, Social and Governance, is a framework that companies can use to report on their impact on the environment, their influence on society, and how they are governed.
Currently, in the UK, the majority of SMEs have no mandatory requirement to either record or report their ESG credentials. Only some large, quoted, and public interest companies with over 500 employees have any reporting obligations.
However, in December 2024, a UK-appointed advisory committee recommended to the Secretary of State that the UK should adopt a set of ESG reporting standards, known as IFRS S1 and S2. This means the landscape of ESG reporting in the UK is about to change.
For most SMEs, this new reporting regime will not create a legal requirement to record or report ESG metrics. However, where it may have an impact is within the supply chain. Larger organisations with mandatory reporting requirements may look to their suppliers to help them adopt more sustainable policies. This is because the greenhouse gas emissions generated by each SME supplying a larger company become part of that company’s reporting obligations.
This shift presents both risks and opportunities for SMEs, depending on how they approach ESG.
Among the larger organisations required to report ESG data are investors who want to avoid financing businesses with poor ESG practices, which they must disclose to their stakeholders. "Green Loans" already exist—funding designed for projects with positive environmental or sustainability outcomes, such as purchasing solar panels. Additionally, “Sustainability-Linked Loans” (SLLs) offer finance where conditions are tied to sustainability targets, such as reducing greenhouse gas emissions.
As ESG reporting becomes more widespread and more SMEs adopt ESG policies and reporting practices, lenders will likely offer favourable loan terms to businesses demonstrating strong ESG credentials. SMEs that do not embrace ESG policies risk missing out on valuable funding opportunities.
What does this mean for the value of my business?
The most significant factor influencing business value is its profit, or “earnings.” SMEs with strong ESG policies and reporting practices can gain a competitive edge by securing new clients that prioritise ESG in their supplier selection—or by retaining existing clients who adopt similar policies.
Additionally, the ability to access funding linked to ESG credentials opens the door to growth opportunities that may not otherwise be available. This, in turn, can drive profit growth.
Many UK SME business sales involve some form of funding, whether from traditional lenders or private equity. If a company being acquired has strong ESG practices, buyers may have a wider range of funding options available, making the business a more attractive investment.
In the near future, companies that proactively embrace ESG—rather than waiting for legal mandates—will be in a stronger position than their competitors. By developing good practices and robust reporting systems, they can drive value growth for their shareholders.
The next step
The status quo for business owners is changing. Now, more than ever, it is essential to seek professional advice to maximise company value. Contact UHY to discuss your ESG strategy, especially if you are considering selling your business.
