Survey indicates enhanced business opportunities for firms that position themselves to adapt to stakeholders’ shifting priorities
The growing importance of environmental, social and governance (ESG) issues has reached an inflection point in the middle market as significantly more executives at these firms report being familiar with ESG and having adopted formal ESG plans, according to the RSM US Middle Market Business Index (MMBI) ESG Special Report released today by RSM US LLP (“RSM”) in partnership with the U.S. Chamber of Commerce. In the third quarter of 2021, 69% percent of middle market executives reported being very familiar or somewhat familiar with using ESG criteria to evaluate performance, which is a 30-percentage-point increase from 39% in the fourth quarter of 2019.
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Middle market businesses are taking action too, as 66% of those respondents who are aware of ESG and support such causes said their organization had formal plans regarding commitments to ESG initiatives. Among those respondents, 32% indicated environmental issues were a cause included in those plans – making it the top-ranking issue included in the survey.
“It is in the economic interest of the U.S. economy in general—and business interest of middle market firms, in particular—that the integration of ESG practices into their core operations becomes essential,” said Joe Brusuelas, RSM US LLP chief economist. “Organizations can no longer wait and hope for the best. They need to act decisively and prepare for a different regulatory framework while shaping market-driven demands going forward.”
The report findings also indicate that larger middle market companies ($50 million to $1 billion in annual revenue) are ahead of smaller organizations ($10 million to $50 million in annual revenue) when it comes to ESG familiarity, adoption of formal plans and using ESG criteria to evaluate performance.
Addressing Environmental Concerns Presents Business Opportunities
Further illustrating their commitment to ESG initiatives, nearly half of survey respondents—48%—stated that their organization was either acting to reduce its net carbon emissions to zero or had already reduced such emissions to zero. When examined by size cohort, this figure was 66% for larger middle market organizations and 23% for smaller companies.
Overall, 20% of respondents said climate change presents significant opportunities over the next three years and 28% of respondents said climate change presents significant challenges, while 27% said it presents both significant opportunities and challenges.
RSM’s analysis indicates that a clear commitment to ESG can help businesses stand out and attract talent. In terms of enhancing their ability to attract and retain workers, 58% and 57% of respondents—respectively—said climate change presents opportunities, either now or in the future, to some extent or to a great extent.
“The pressure to support ESG initiatives is mounting from a variety of stakeholders, including customers, employees, industry peers and regulators,” said Anthony DeCandido, partner and financial services senior analyst with RSM US LLP. “As such, we expect plans to take on even greater importance in business operations and to have a bigger impact on financial performance. These plans have proven to be good for business and society overall.”
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Increased Focus on Reporting Indicates ESG No Longer A “Nice to Have”
Results from RSM’s survey show the use of metrics to measure success around ESG goals has grown over the last two years, indicating that ESG is becoming a central pillar interwoven throughout companies’ operations. Among respondents whose organizations are aware of ESG and support such causes, the share who said their companies use ESG measures to a great extent to evaluate their performance increased to 36% in the third quarter of 2021 from 26% in the fourth quarter of 2019.
Of the respondents who said they use ESG to a minor extent, to some extent or to a great extent to evaluate performance, 77% said their organization provides external reporting on ESG performance, and 65% are attempting or have attempted to gauge the broader potential impact that achieving ESG goals has on the environment or society. Sixty-six percent said their organizations have dedicated senior executives whose primary responsibilities include establishing and achieving ESG visions.
Other ESG Initiatives Included in Middle Market Organizations’ ESG Plans
While environmental issues lead the way among a diverse list of ESG issues and causes, fair trade and/or sourcing, community health and wellness, and educational support initiatives were the next highest-ranking options that executives stated including in their ESG plans. Other causes included gender equity, support for the LGBTQ community and racial justice.
Of the respondents somewhat familiar or very familiar with ESG, 78% said they include diversity and inclusion policies in the initiatives they report on externally, 59% said they include ethnicity pay gap initiatives in such reporting and 55% include gender pay gap initiative information.
“Organizations that want to further develop their ESG framework should consider performing an assessment of the business to see where its ESG priorities stand,” DeCandido said. “While the upfront investment may be daunting, the price of ignoring ESG demands far outweighs the cost of implementing a strategy around these issues. Executives who feel overwhelmed at the breadth of ESG issues and how to address them may want to begin by focusing on manageable, short-term goals that can help build momentum.”
The survey data that informs this index reading was gathered between July 8 and July 26, 2021.
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