GUEST POST: ESG/SUSTAINABILITY REGULATIONS – The Coming Impact on Middle Market and Small Business

By: Jenifer Faust (Faust Global Partners) & Dean Emerick (ESG The Report)

In 2023, there will be an increased focus on sustainability and ESG-related regulations worldwide. In the United States, the Securities & Exchange Commission (SEC) is expected to release a final version of its climate disclosure rule by April. This much-anticipated rule will require all U.S. publicly traded companies to disclose their climate risks, governance structures, risk management processes, and climate metrics. With a push-down coming from the SEC and a groundswell rising from stakeholders, ESG will remain a hot topic for businesses across the globe, and we expect the middle market to feel squeezed.

As federal, regional, and local authorities worldwide take concrete steps to prioritize environmental protection, social equity, and corporate governance in their regulatory practices, business owners and investors must assess how these changes will impact the middle market segments and smaller operations. Understanding how business and marketing strategies must adjust to adhere to emerging ESG/sustainability regulations is critical to achieving success in today’s fast-paced global economy.

ESG-related disclosures for small businesses, the middle market, and investment companies have only been “encouraged” to report. We see this grace period ending in 2023 and expect the same standards will increasingly be imposed on private companies as public companies use their suppliers to assess their sustainability performance (e.g., Scope 3). This also means that SMEs supplying and supporting large corporations will increasingly be selected as vendors or preferred suppliers if they meet the sustainability demands of larger public organizations. Moreover, we anticipate bank financings will increasingly tie to ESG and sustainability conditions as large, publicly listed banks report on their ESG progress and goals. Adherence to such disclosure expectations requires significant time, money, and personnel investments. In turn, this will stress middle-market companies, which may need more capital, software, and expertise to comply with these fast-paced regulatory and reporting changes.

ESG/sustainability regulations are here to stay and will continue to affect private enterprises and public corporations, regardless of size, location, or market position. However, smaller businesses may struggle with implementing such requirements due to costs or lack of knowledge which could leave them at a disadvantage compared to larger enterprises in the global landscape. Nevertheless, embracing change and accountability for environmental issues can help ensure long-term success for small and middle-sized businesses.

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