Adopting sustainability strategies can boost SA SMEs

Jeremy Lang

Many startup and small and medium-sized enterprise (SME) owners in South Africa believe that sustainability strategies are only relevant to large corporates, but there are many advantages to making sustainability the foundation of any new business. 

This is according to Jeremy Lang, Regional General Manager at Business Partners Limited (BUSINESS/PARTNERS), who says that it is often difficult to sell local SME owners on the idea of sustainability, largely because of the perceived costs and time involved.

“However, the benefits of implementing a sustainability strategy early on in the life cycle of a business far outweigh any cost implications. Small businesses built on sound sustainability principles could even see themselves gaining a competitive advantage in their respective sectors,” says Lang.

He points to a recent study by McKinsey that revealed a strong correlation between resource efficiency and financial performance among businesses surveyed. “The companies with the most advanced sustainability strategies did best of all in this particular study.”

Lang explains that in business, sustainability consists of three distinct aspects: “A good sustainability strategy incorporates economic, environmental and social performance goals. Each of these also have a direct benefit for the SME if managed correctly.”

Starting with economic performance, Lang says that this is the area where a business can see the quickest results. “McKinsey’s study measured the amount of energy, water, as well as waste that companies used, in relation to their revenue, and concluded with 99% confidence that it had a direct correlation with profits.”

He notes that in South Africa, the above-inflation rate increase in electricity tariffs in recent years, coupled with increased uncertainty over the availability of water has placed significant strain on SMEs to date. “The good news is that the cost of installing renewable energy generation technology (which can cost upwards of R100 000) can be offset by the tax benefits involved. The Income Tax Act allows businesses to enjoy accelerated capital allowances, in respect of renewable energy spend, as a tax deduction. The quantum of the deduction will vary depending on the nature and purpose of the spend. These tax incentives are aimed at driving down operating costs and enjoying a return on the capital investment over a shorter term.”

Lang says that growing a corporate culture of water saving and investing in water efficient technology on the production side, will, in turn, help a business to manage its risks during times of water shortages. “Drought and water shortages are very real in a country like South Africa. This form of resource risk management is an integral part of ensuring that your business can survive when there is a crisis. Lastly, reducing waste through more efficient processes and by recycling can help to drive down costs even further.”

The environmental aspect of sustainability is also vital for SMEs to keep in mind. “Large businesses are coming under increased pressure from regulators to minimise their impact on the environment, and it is common to see big companies spending huge amounts of money on environmental rehabilitation and pollution reduction schemes as part of their legal requirements. However, SME owners need to be aware that environmental obligations will start to impact them more and more. The carbon tax, which will be implemented in 2019, is just one example.”

Rising fuel costs will be the most obvious effect of the new tax, he says, which is why SMEs will need to find ways of making their logistics more efficient. “Optimising delivery routes, investing in fuel efficient vehicles and partnering with specialised supply chain service providers will become increasingly important.”

Finally, Lang says that making room for social considerations in a sustainability strategy can help an SME unlock new opportunities. “McKinsey’s study notes that although building strategies around social issues is often seen as a luxury that smaller businesses can put off until later, investors, both large and small, are increasingly comfortable with the idea of putting their money into socially responsible investment. The study also shows that making an effort to uplift and invest in the community will potentially reward the business with new opportunities to grow and improve its bottom line”

He says that making socially responsible investment also creates opportunities for local SMEs to engage with like-minded international companies. “The US and Europe have seen a 22% increase in socially responsible investment, according to McKinsey. That is why multinational businesses based in the US and Europe are becoming increasingly enthusiastic about partnering with local businesses who can prove that they have socially responsible practices already in place.”

As the pressures caused by climate change, rising resource costs, political issues and social responsibility continue to mount, SMEs that embrace sustainable practices early on in their operation may find better ways to close the gap between them and larger competitors. “Building a business on the principles of best practice from day one, is imperative for local SMEs that aim to become industry leaders,” Lang concludes.