Transitioning to sustainable business models

• Small companies today need to consider the ESG code of conduct of the larger firms they want to supply to.
• Social and governance issues are gaining in importance and can be as crucial as environmental concerns.
• Sustainability is the cost of entry in business today, so SMEs need to transition to a sustainable business model as soon as they can.

Customers today are demanding more sustainable products. They want the company they purchase from to show its ESG credentials, but they’re also looking for sustainability all the way back through the supply chain to the source. And the breadth of their sustainability interests is wide. They are concerned with forced labour and workers’ rights, with how raw materials are mined and refined, and with how different source materials are transported and delivered.

"Sourcing sustainable suppliers may have once been something of a pet project, but now it’s a cost of doing business. Datin Mina Cheah-Foong is Managing Director of InNature Berhad, a Malaysia-based retailer of cosmetics and personal care products carrying The Body Shop and Natura brands. Speaking at Drive 2022¹ , she said that her firm was seeking sustainability from even its smallest suppliers.

“If you’re a small startup, it’s just yourself and maybe one or two employees, then we understand that you can’t go and get certified by FTSE or become a B Corp, it’s too expensive and out of reach. But we still have different classifications and different criteria to assess your sustainability,” she said.

“For a business turning over only $10,000 or so, it’s done on a conversational basis, talking to you about your employment policies and other issues. But if you’re anything over $25,000, then we give you a copy of our supplier code of conduct and expect you to adhere to it. Those companies above $250,000 should have an outside audit or be publishing reports that are transparent about what they’re doing in sustainability.”

"Many smaller businesses start their sustainability journey thinking about environmental issues, but for most major corporations, social and governance issues are reaching equal importance. Within these segments, employees are high on the list, and that can be about gender equality, labour rights, fair pay, work/life balance, or all of the above.

“For governance, the company should have policies and training programmes in place to help workers meet those policies and operate by the company’s code of conduct. For environmental and social issues, we understand that resources are finite, so it has to be the issues that can integrate into your, and our business,” says Cheah-Foong.

“We don’t have a fixed allocation, but we do look for companies that align with our business goals, for example, women’s rights or sustainable packaging.”

"For SMEs, it’s clear that they need to think about their sustainability strategy in line with the companies they hope to partner with. Creating a targeted sustainable business model, however, can be challenging for smaller firms, especially startups. Cintia Nunez is Co-Director of The Mills Fabrica, an incubator and accelerator for techstyle and agrifood tech innovations. She agrees that the opportunities and challenges differ depending on the kind of industry you’re in, what materials your business uses and even your ability to raise funds for sustainability.

“One of the biggest challenges is that there’s just so many new technologies that people may not know what’s out there in the market,” she says. “We have one startup that’s turning methane gas into biopolymer to produce alternative packaging. Who would ever have imagined that one day we’d be turning waste into an asset? That’s just one example.”

Part of what’s combatting that is that a collaboration model is beginning to emerge to help sustainability spread across the supply chain. Nunez sees brands, retailers, companies and manufacturers coming together to educate each other on best practices. Cheah-Foong also points out that many larger firms have a supply chain commitment statement.

“That statement sets out all the things we expect, all the things we do ourselves and all the ways we want members of our supply chain to be engaging with sustainability. So if you have a target company you want to supply to, look to that company to see what they’re doing. See if they have a code of conduct and if your company is already aligning on some of their issues,” she says.

"Both Nunez and Cheah-Foong see sustainability as the cost of entry in business today. Companies can’t afford to stand still, they need to be transitioning to a sustainable business model.

Nunez points out that as a business owner, even as an individual, it’s clear that business-as-usual cannot continue. The latest IPCC report, published in April, shows that the world is still on a course to surpassing 1.5 degrees of warming, which will have dire consequences.

“The world faces unavoidable multiple climate hazards over the next two decades with global warming of 1.5°C (2.7°F),” the IPCC said² . “Even temporarily exceeding this warming level will result in additional severe impacts, some of which will be irreversible.”

This level of urgency means that even simple steps will help. Nunez recommends looking at the basics – water and energy usage, for example. The key question is; what’s material to your business? While there’s no perfect solution, every step taken now will help, and is very likely to also cut costs or increase efficiencies in your business.

Cheah-Noong adds; “It doesn't matter how big you are, how small you are and where you are on this journey because we are all learning as we go. There's a lot of information on the internet already about how to start your sustainability journey and what you need. And then your target company has already published all of its information, so you already know what you need to do before you get in there. Just make a start.”

To find out how HSBC could support your sustainability goals, speak to your relationship team.