Sustainability is quickly becoming a must-have rather than a nice-to-have for the mid-market. Firms are being driven by market competition, client demands and investor pressure, whilst in parallel they are under pressure to meet increasingly stringent regulations and standards. Yet for many firms this is brand new territory, and they don’t have a road map or blueprint to follow.
The mid-market’s role in the global supply chain means that it forms a vital part of the business ecosystem, connecting and serving organisations and their clients across the globe. As the mid-market becomes more sustainable itself, it will enable larger corporations to comply with supply chain requirements as well as set an example and pave the way for smaller firms: it becomes a lynchpin for the sustainability of the global ecosystem. To play its full role, the mid-market will need the right guidance, support and business environment that allows these businesses to thrive.
Described as the driving force of the global economy, the mid-market holds a vital role in the business ecosystem, connecting and serving organisations across the globe.
Our latest SNG Grant Thornton International Business Report (IBR) explores the significance of this role, highlighting the progress and actions of the mid-market on their journey towards a sustainable future.
The mid-market is being pulled to sustainability by the commercial opportunities it presents. Consumers increasingly look to support brands with strong credentials, while investors are increasingly conscious of the long-term value it can provide. Sustainability has become more than just a buzzword, it’s a commercial opportunity:
This sentiment is reflected in our International Business Report (IBR) research. It shows that the most important factor encouraging South African businesses to focus on sustainability is market competition.
Given the importance of the mid-market to global sustainability, it’s key that we understand the obstacles they encounter in this area. Locally, the mid-market identifies three key barriers to successfully developing ESG initiatives:
Barriers to implementing sustainability initiatives vary by region. Mid-market companies in Africa consistently report that cost is their main barrier (23%). This is likely because many African mid-market organisations operate in developing economies with reduced access to capital. However, this does not necessarily reflect the appetite for sustainability in this region and is more a reflection of the commercial reality.
The sustainability regulation landscape is rapidly evolving globally, and the legal liability for ESG disclosures is also increasing. This regulatory burden has ramifications for business costs –disproportionately affecting the mid-market, who are often large enough to be in scope but with less resource to achieve compliance.
From our research and the IBR data, we have produced a proposed model for a ‘sustainability cycle’ which depicts the phases most mid-market firms will go through on the journey to becoming a sustainable business. The cycle is comprised of four phases, each encompassing different actions on sustainability. From the data we can also determine that the cycle is continuous and iterative.
Our analysis shows that mid-market firms undertake many different combinations of actions on sustainability. Each cycle through the phases, fuels subsequent ones, and as time goes on, a complex and interconnected journey forms.
Our report uncovers where the mid-market has taken the first steps, and how there is still a way to go.
Top three actions taken:
As mid-market firms advance on their sustainability journey at differing paces, and begin to create their own sustainability cycles, many can be categorised in the following ways.
Businesses at the Discover stage tend to be starting out on their sustainability journey. Their key barriers are access to finance, and a lack of stakeholder buy-in. They are also unlikely to be under pressure from a regulatory or compliance perspective. Companies in the region of Africa tend to fall into this category.
Recommendations: Begin by assessing how action on sustainability might fit with your business strategy, including low-cost options e.g. waste management, and then devising a strategy and speaking to senior leadership to get stakeholder buy-in.
Organisations at the Explore stage are under less regulatory compliance burden domestically, but do have greater access to finance than Discover. They are therefore driven primarily by protecting and enhancing their brand and using sustainability as a competitive and commercial advantage. These organisations are often found in the United States.
Recommendations: Seeking advice on the assurance and reporting of your data is wise in order to avoid accusations of greenwashing. In addition, if planning expansion into jurisdictions with greater regulatory compliance requirements, speak to an advisor to guide you through this process.
The Evolve stage is where businesses are growing their investment in sustainability, these are often companies in regions such as Asia-Pacific which are heavily involved in the global supply chain. For this reason, they are required to comply with sustainability regulations set by larger/international client organisations. Their biggest barrier is still cost, but they are driven more by brand reputation and market competition.
Recommendations: Our key recommendation is to ensure that data gathering is accurate, complete and organised. This will enable subsequent iterations of strategy and implementation to be more efficient and effective. It will also enable reliable reporting and therefore higher levels of trust associated with the brand.
Companies at the Endurance stage are found in regions with the most mature and sophisticated regulatory environments, such as Europe and the UK, and are likely to have carried out more complete sustainability phases. Endurance businesses are driven towards sustainability by competition and protecting their brand, but also often by a sense of purpose.
Recommendations: As compliance is key for these organisations, we recommend seeking advice on how to simplify the regulatory landscape and be compliant across multiple jurisdictions. Mid-market firms should also seek advice on how to link any actions undertaken so far, so that their reporting and implementation phases are cohesive.
Our data suggests that mid-market companies are not currently focusing on sustainability reporting, and implementation, and are instead concentrating on strategy or data gathering. 46% of firms say that they plan to implement a strategy in the next 12 months, whilst only 35% of firms say they plan to begin reporting.
This may reflect mid-market firms’ interest in brand reputation and taking actions that are visible and engaging for customers and stakeholders. It also reflects a reluctance to engage with some of the new regulations, and a procrastination by many firms when it comes to reporting requirements – either fearing the investment required, greenwashing allegations, or simply not knowing where to start.
Where businesses are investing may also indicate where they are in the sustainability journey: waste management and clean water are greater focuses of investment for mid-market firms in Africa which tend to be in the ‘Discover’ stage, whilst the most frequent selection for firms in Asia-Pacific, many of whom are at the ‘Evolve’ stage, are sustainable procurement/ supply chain reform and new sustainable products. Interestingly, renewable energy is selected by the highest proportion of businesses from North America, Asia-Pacific and Europe. This may be because the renewable energy sector is fairly well developed and decarbonisation is becoming an increasingly pressing economic and political priority for many countries.
The world needs a sustainable mid-market. It’s vital to economies, societies and the planet, because mid-sized businesses are the cogs which make the wheel of the global economy turn.
They are a key part of global supply chains, where much of the sustainability agenda will end up focusing. Mid-market businesses are also more likely to be customers of SME enterprises than larger businesses, and so have greater potential to influence sustainable behaviour in that cohort than larger businesses.
Mid-market firms are mainly motivated by commercial factors, and in particular brand reputation.
As sustainability starts to bring greater commercial advantages and become a business necessity, access to finance will increase in importance. Investors will look out for businesses that have a good story to tell on sustainability, and that are accountable for their performance. Regulatory requirements are increasingly a global concern, as international markets come into contact with regional regulations, such as CSRD.
The mid-market is struggling with the high cost and complexity of aligning with rapidly changing regulations. Additional market dynamics, such as brand and supply chain requirements, are also putting significant pressure on mid-market companies.
Often mid-market firms don’t know where to start when it comes to regulations, and so delay implementing sustainability measures. This is not helped by a regulatory environment that confuses many. Over time, this could lead to a dilemma whereby investment is needed to implement sustainability, but solid sustainability credentials are needed to attract investment. As further regulation comes into place, providing investors and consumers with data that allows them to compare progress, this will become a real concern for many businesses. Perceived poor performance on sustainability could drive potential investment elsewhere.
The regulatory burden may be a barrier to mid-market businesses’ international expansion plans, if they are not prepared to collect and report sustainability-related information as required by foreign jurisdictions.
As regulatory expectations grow, organisations will increasingly demand that their supply chains begin to collect and report sustainability-related information. A contractual obligation to provide this data is one mechanism companies may use to enforce this demand. For those in the supply chain that are unprepared, it may become a barrier to trade.
While complying with multiple sets of sustainability regulations should become ‘business as usual’ for many firms, there could be some growing pains for the international market, emphasising the need to seek good advice.
A ‘one-size-fits-all’ approach to sustainability doesn’t work. Most mid-market firms have taken at least one step on their sustainability journey but firms’ starting points are different.
Where companies start in the cycle is usually determined by the driver that has led them to invest in sustainability. If exposed to regulations and disclosure requirements, often they will begin with data gathering and reporting. For others, it makes more sense to begin with a strategy, and then begin
Take action sooner rather than later, when it comes to reporting requirements. Regulations and standards are only likely to get more complex and the resource to supply advice more scarce, which could increase the cost of becoming compliant.
Rather than waiting for implementation deadlines, acting now will give you time to build up your knowledge and processes, facilitating a smoother transition and helping to minimize the challenges of implementation. Improving the quality of your data requires time and investment, and so the earlier you start this process, the better.
For mid-market firms who get it right, being sustainable can offer a competitive advantage, whilst protecting brand reputation.
When you first see the complex legislation and regulation governing disclosures, you may see sustainability as a barrier. However, moving forward you should see it as an opportunity to enable deeper thinking about how to ensure the long-term health of your business.
Getting sustainability right will make your businesses more attractive to investors as well as customers, by strengthening and differentiating the brand. You will be more resilient, more easily able to attract and retain customers, access new opportunities and enter new markets.
Some mid-market firms may be hesitating to take action due to the complexity involved, but speaking to an adviser can help overcome some of this reluctance, simplify the process and plot the right course.
We understand how overwhelmed many mid-market firms feel – you have a product or service to sell, and sustainability is not your day job. Speaking to an advisor can help alleviate this and enable you to progress on your sustainability journey. Our job is to understand new requirements, we have a whole team of resource dedicated to this, and experience implementing requirements for clients all over the world.
Larger companies need to work with their mid-market counterparts in supply chains to help them navigate regulatory issues. The world needs a sustainable mid-market and so do they.
Navigating complex sustainability regulations is something many large firms are already doing. Sharing the expertise gained from this process will help their mid-market partners to adapt more effectively. Cooperation ensures a more resilient and compliant supply chain, enabling larger companies to meet their own sustainability goals, particularly in reducing Scope 3 emissions. A sustainable supply chain leads to reduced risks, improved efficiency, and enhanced reputations for all involved.
The sustainability journey is not a sprint. It is likely to take most businesses several years to perfect their strategy and reporting and to adjust to external factors, but as always, the most important action is to take the first step.
Taking the first step in the sustainability journey is crucial regardless of a business’ size or industry. The first step, whether it's conducting a sustainability assessment or implementing a small-scale initiative, sets the foundation for continuous improvement and will position the company to better navigate the ever-evolving regulatory landscape. To establish where you are and to find out where you need to go next on your sustainability journey, find your nearest Grant Thornton Sustainability Advisory team.
Our latest SNG Grant Thornton International Business Report (IBR) explores the significance of this role, highlighting the progress and actions of the mid-market on their journey towards a sustainable future.
