The ESG pivot: From regulatory compliance to strategic opportunity

The ESG conversation is no longer about compliance. Where sustainability was once a reporting obligation managed by compliance teams, it's now driving strategy across every department.  

Leading businesses have seen that integrating sustainability into strategic decision-making and planning has made them an attractive investment, employer and business partners— all while building resilience. 

In this article we discuss how this evolution came about, how businesses can integrate ESG into their strategy and operations, and the complexities mid-market businesses should prepare for while embedding sustainability within their organisations . 

The first phase of ESG: Compliance and reporting 

The advent of the International Financial Reporting Sustainability Standards (IFRS-S) and European Sustainability Reporting Standards (ESRS) has resulted obligatory sustainability reporting for many companies in globally and in the EU.  

In the EU ESRS reporting has been legislated, while for the rest of the world IFRS-S is steadily being adopted.  Both sustainability frameworks require companies to report on specific metrics and targets depending on what material sustainability issues the organization faces.  And while these requirements served as a necessary foundation for ESG compliance, they often caused reporting fatigue. Despite the stringent requirements for reporting investors remain concerned that sustainability reporting contained unsupported claims leading to greenwashing. 

Why ESG has moved into the boardroom 

Sustainability is a strategic matter with severe consequences if not addressed correctly. Increasingly, ESG data management and reporting capabilities are seen as critical to business goals. Sustainabiilty impacts businesses in the following ways: 

First and foremost, to raise capital: Investors rely heavily on company reports to assess risks and opportunities. Businesses are expected to provide greater transparency as climate change, regulation and technological disruption reshape business models. This includes creating assurance over material sustainability information. 

Secondly, to increase buy-in: Meeting ESG goals isn't feasible without cross-functional collaboration and integration. When executives champion ESG as a core strategic priority, it shifts from a siloed compliance exercise to an actual driver of change across the company, enabling smarter decision-making and stronger stakeholder support.  

Thirdly, businesses are able to mitigate the risks that climate change, transition to renewable energy and a new regulatory landscape bring and are also able to take advantage of new opportunities that arise due to these changes. 

The strategic integration of ESG 

ESG is starting to influence the choices companies make about what to build, whom to buy from, how to attract people, where to invest, and how to run assets more efficiently. 

Corporate strategy 

The World Economic Forum says sustainability is seen as a catalyst for innovation, growth, and long-term value creation. Businesses are factoring ESG performance into product development cycles, capital allocation decisions, and market expansion strategies. McKinsey reports that corporations view sustainability as a growth opportunity to embrace new business models. In contrast, the "do nothing" approach is now regarded as a value destroyer, making it a less appealing alternative. 

Supply chains 

The UN Trade & Development notes that meeting sustainability standards is becoming a prerequisite to joining global supply chains and capital markets, irrespective of business size. This is because sustainable value chains can improve resilience, profitability, customer retention, and operational performance. Mid-market businesses can use their ESG credentials to negotiate partnerships with enterprises that are held to the same standards. 

Talent attraction and retention 

The World Economic Forum notes that 94% of employers worldwide say they lack the skilled talent needed to achieve ESG goals, while 70% are urgently recruiting green talent. There is a clear demand for people in the environmental space. But to fill this gap, employers need to do a lot more than offer good compensation.  

Over 60% of today’s workforce is made up by Gen Z and Millennials, who value financial reward, meaning, and well-being at work. They expect their employers to hold similar values. Businesses with strong ESG principles can attract talent that's invested in long-term success. 

Operational efficiency and innovation 

Integrating ESG data into operations can help meet more than just sustainability goals. It can also improve visibility into operational efficiency and help companies make better decisions around energy use and resource consumption while lowering operational costs. Leaders who understand this are investing in ESG data collection, AI analysis, and cross-functional updates to attain business objectives.  

Why the mid-market faces unique ESG challenges 

In 2023, more than 80% of SMEs recognised sustainability as a substantive issue, but only 7.7% were undertaking sustainability reporting. This is because many mid-sized companies face enterprise-level stakeholder demands without enterprise-level budgets.  

The primary obstacle for SMEs is the fragmentation of international standards in sustainability disclosure. Mid-market firms often struggle with identifying which ESG frameworks are most relevant. They also face difficulties in obtaining quality data from their own suppliers to feed into these frameworks. 

Another area where mid-market businesses struggle is budget. A smaller purse forces SMEs to balance necessary capital investments with longer-term ESG initiatives. And building the reporting infrastructure without dedicated resources can quickly become an operational headache. 

A third obstacle comes from partnerships: Large enterprises are required to work with partners (big and small) that also meet ESG requirements, as it affects their ESG. This forces SMEs to gather data to meet the ESG requirements of their larger partners. However, many mid-market firms lack dedicated sustainability teams and a mature digital infrastructure.  

Take Scope 3 emissions, for example. Eighty-three percent of businesses struggle to access Scope 3 emissions data in both upstream (suppliers) and downstream (customers) activities. This pushed regulators to offer a phased approach for SMEs.  

The good news is that mid-market businesses don't need to solve everything at once. Companies can start by focusing their resources where it matters most — identifying ESG factors relevant to the business. From there, incrementally invest in data collection and reporting tools to build the foundation for more comprehensive ESG integration over time.  

The next phase of ESG: From reporting to value creation 

The first phase of ESG produced better disclosures. The next phase — value creation — will separate those that treated ESG as a growth lever from those that treated it as a checkbox. The evidence supports this. Investors are demanding credible, decision-useful data. Supply chains are conditioning market access on sustainability performance. Talent is gravitating toward organisations with genuine ESG foundations and operational integration is already delivering measurable efficiency gains. 

This presents mid-market businesses with a big opportunity: Building ESG foundations early can lead to strategic partnerships that would otherwise be unattainable. However, many mid-market businesses lack the resources and knowledge to meet these expectations. Working with experienced advisors can help firms navigate framework selection and avoid the cost of getting it wrong.