25% of shoppers willing to pay more to environmentally friendly brands

Small and Medium-sized Enterprises, start-ups, scale-ups and all sizes in between, are the backbone of the UK economy.

SME contributions to the UK economy across the top 10 UK cities are forecast to hit £217 billion by 2020 and businesses in this bracket are a catalyst for dynamism and innovation.

The combined annual turnover of SMEs in 2016 was £1.8 trillion - 47% of all private sector turnover in the UK and those companies capable of going the distance would be destined to become the business titans of tomorrow, in normal circumstances.

However, there are headwinds today that did not impact the aspiring businesses of yesteryear. SMEs are operating in a fast-changing societal and cultural environment and in a landscape of flat economic growth.

Futurists and analysts observe that the capitalist-consumer model familiar to the Western world for decades is in a period of upheaval; many studies suggest that people are transitioning from identifying themselves chiefly as consumers to creating a sense of self based on more than owned possessions.

We’ve already seen this idea surface in the media via references to “peak stuff” and there are a number of studies worth perusing on this issue.

The signs point to SMEs needing a new framework on which to base business strategy if they are to stay relevant and prosper – one that takes these societal changes into account.

How can they align with the new dynamics at work?

There is mounting evidence that critical decisions and actions in the future will need to be made via the lens of ‘positive impact’- meaning the social and environmental impact of how the company operates becomes its foremost consideration.

Hard-pressed owner/managers trying to stay afloat may not see immediate value in pursuing ethically and socially-minded business practices.

However, an exclusive poll of CEOs at SMEs shows 88% of respondents do believe it is important for ethical business practices to be incorporated into everything they do.

This study provides a snapshot of what small businesses currently think is possible, what they don’t think they can manage and their understanding of the benefits that might accrue from such radical change, including differentiation, lower costs and loyal customers.

It includes advice from companies that have blazed the trail and after reading the insights and inspiration contained within, we hope SMEs will see that investigating a new approach to business will prove an investment rather than a cost.

The price of inaction may well ultimately determine if a business scales or fails.

Survey of SME CEOs

Calls for businesses to begin thinking about how their actions affect both society and the environment are getting louder.

However, the language surrounding the issues can be confusing.

The immediate default is to think ethical business practice means environmental sustainability – but positive impact covers a wide breadth of action, from putting an ethical lens on your supply chain to implementing energy efficient practices, ensuring a work/life balance for employees and championing diversity in the workplace.

A poll of 100 CEOs at small or medium-sized enterprises (SMEs) shows that treating employees fairly, sourcing manufacturing materials responsibly and being energy efficient rank high in their consciousness when presented with list of possible ethical business practices.

But less than a third believe such practices should include listening to stakeholders other than shareholders and financial backers.

This is not surprising in entrepreneurial companies that have been built and bootstrapped in many cases by the person still in charge. It’s their single-minded vision driving the company - but ultimately listening to other opinions beyond shareholders and financial backers can prove invaluable.

Influence of Millennials

It is evident that people are beginning to demand that their products and services are developed and delivered with a reduced negative impact on society and the environment.

71% of respondents to a World Economic Forum survey say they want brands to act in an environmentally friendly and ethical way and 61% want to connect with a cause or social issue.

The millennial generation is particularly inclined to hold companies accountable to positive values. This highly educated, tech savvy cohort account for approximately a third of retail sales and nearly 75% say that they are willing to pay extra for sustainable offerings.

By 2025 millennials are expected to make up 75% of the workforce and businesses should be tapping into and harnessing their attitudes to help shape company culture rather than resisting new ideas and approaches.

If smaller companies need an incentive, note that a Sodexo survey shows that 47% of people aged 16 to 24 believe SMEs are the right size company to work for - 5% more than those over the age of 40.

If you can operate your company in a way that is more helpful to society and the environment, then you are aligning with a growing consumer trend.

Only 15.5% of the SMEs we polled doubt that their customers are interested in positive impact business practices. Multinationals are already paying attention and changing their Merger & Acquisition strategies in recognition of this new reality.

If corporate giants like Unilever, Danone and Johnson SEC start prioritising investment in companies pursuing a positive impact agenda, then the direction of travel is clear.

There are solid commercial reasons for companies to adopt ethical practices, but the challenges need to be acknowledged.

The requirement to re-evaluate how you do business, audit supply chains and listen to opinions from employees and elsewhere can be time-consuming, when SMEs feel all their efforts should be concentrated on building sales and scaling up.

The perceived cost of implementing change is the biggest hurdle with 41% of CEOs at SMEs believing adopting ethical business practices will be too expensive.

Fewer (17.5%) are concerned about how they measure the impact of such practices – but measurement should matter and are key to convincing financial controllers and investors.

On the other hand, 88% of respondents believe it is important to incorporate an ethical dimension into everything they do as a brand – and a similar percentage stress the importance of consumers seeing them act in this way.

Nearly a third see no barriers at all to embracing ethical business practices. Each company will have to weigh their concerns against the potential benefits of a positive impact strategy.

But the arguments to adopt a new business lens if you want to develop and retain a competitive edge in an increasingly fast-moving world are becoming stronger.

Conclusion

SMEs can become hubs of innovation attracting talent based on their understanding of how people are changing what their value in their lives.

Our findings suggest that businesses realise a sea change is underway and they have a role to play – seizing that role and putting other goals on a par (if not ahead) of profit should create a stable foundation for growth.

This will require a change in mindset and ditching the short-term approach to business characterised by a focus on the quarterly or half yearly profits, but the very concept of business value is changing.

What’s to gain? Everything, including a continued existence in a world where so many traditional consumer models are failing.

Companies willing to explore and create a new framework for doing business have the chance to do something very different – to scale and enable a more sustainable, higher margin set of cultures based on people and values.