CHICAGO – (November 3, 2022) – Support for environmental, social and governance (ESG) initiatives remains high among middle market companies as their ESG priorities evolve to better align with industry and organizational goals, according to the RSM US Middle Market Business Index (MMBI) ESG Special Report released today by RSM US LLP (RSM).
In the third quarter of 2022, 70% of middle market executives report having formal plans or strategies regarding ESG initiatives at their company, which is up from 66% for the comparable period a year ago. Sixty-nine percent of companies said they now have a dedicated senior executive whose primary responsibilities include establishing and achieving a vision for ESG.
“The bar has been raised for ESG commitments and policies,” said Anthony DeCandido, partner, financial services senior analyst and co-leader of sustainability service solutions with RSM US LLP. “ESG is maturing and companies are now beginning to increase their focus on select indicators that can really make a difference in organizational performance. Recent economic headwinds are also influencing some organizations to refocus their efforts, particularly smaller organizations who are more directly aligning ESG activities with their core priorities.”
The survey results highlighted such disparities in ESG investment levels between smaller and larger middle market firms, as larger companies ($50 million to $1 billion in annual revenue) had higher levels of investment and more ESG activities than smaller organizations ($10 million to $50 million in annual revenue). RSM attributes this gap to several factors, including the fact that larger organizations typically have more resources to dedicate to ESG initiatives. Larger companies are also more likely to go public and thus more inclined to proactively establish strong ESG policies before they are subject to regulations and investor inquiries.
Middle Market Firms Focusing on Specific, Achievable Initiatives
The survey results indicate that companies are focusing on what they can realistically accomplish and are striving for specific objectives, rather than attempting to tackle a broad range of ESG concepts. The specialization of ESG initiatives could be one reason why only 56% of companies with a formal ESG plan specify all their commitments in their policies. This percentage is down from 72% a year ago, implying that organizations may be exercising greater precision in highlighting certain aspects of their ESG efforts.
While ESG encompasses a broad range of topics, 28% of organizations with a formal ESG plan included environmental issues in their strategy, making it the most popular of all ESG topics. Other top issues include entrepreneurship and small business, which 26% of companies have put into their plans, and energy issues, which 24% of companies have addressed.
Among all respondents—both those with a formal ESG plan and those without one—50% expressed support for community organizations, which was a significant increase over the 36% that said the same the previous year. Also increasing in popularity was educational support, which was up to 43% from 37% last year, and support for community health and wellness, which increased slightly to 36% from 35% the previous year.
Smaller companies were significantly less likely than their larger peers to have initiatives that addressed topics such as the gender pay gap, an issue for which 45% of bigger companies have a policy, versus 32% of smaller companies.
Other ESG initiatives saw declines, including the number of companies saying they list gender equality in their plans, which was down to 14% from 22% the previous year.
ESG Plans Motivated by Business Goals, Regulatory Requirements and Intrinsic Value
While business concerns will always be a prime motivator for any company to take action, ESG appears to have a strong intrinsic value. Forty-one percent of respondents say they have embraced these initiatives because it is the right thing to do as an organization, which is up from 35% the previous year.
Among companies that have instituted formal ESG plans, 97% say the desire to mitigate the impact of emerging regulations or new laws is an important consideration. Other primary reasons for companies to institute formal ESG plans include reducing or eliminating a competitive disadvantage, improving relationships with current or potential suppliers, and enhancing a commitment to the communities in which the organization does business.
Environmental Concerns Remain a Priority, with Specific Objectives Shifting
A significant majority of companies acknowledge that climate change is a threat to their businesses. About two-thirds of executives polled in the MMBI survey say that—to at least some extent—climate change will lead to higher operating costs, an increase in the price of raw materials or commodities, and a decrease in the reliability of supply chains.
Environmental issues gained the support of 32% of all respondents, though many organizations have scaled back their environmental ambitions. The number of companies that list reducing waste and better energy management as specific goals in their environmental plans both declined from the previous year.
In addition, the degree to which organizations are making investments to reduce their carbon footprint has decreased, dropping to 61% from 68% the previous year. Only 11% of respondents say they have achieved net zero carbon emissions, which is down from 25% for the comparable time period.
Some companies see opportunities in the climate crisis. Over half (52%) of executives surveyed believe they may eventually lower their overall operating costs because of sustainable energy technologies, and 58% think they could garner positive public relations by becoming a leader on climate issues.
ESG Reporting Continues to Increase as Middle Market Firms Measure Progress and Impact
Eighty-eight percent of companies provide external reporting on their ESG performance, a statistically significant increase from 77% the previous year. However, the ESG Special Report explains that some companies are likely being more precise about stating their goals and are working on collecting sufficient data to prove their claims.
Of the companies that support causes and are very or somewhat aware of ESG, 17% do not report externally on their initiatives, a number that was a mere 2% the previous year. Of those that support causes and are very or somewhat aware of ESG, 67% have attempted to gauge their policies’ broader societal impact, up from 65% previously.
Of the companies that have implemented formal ESG plans, over two-thirds (68%) say they are committed—to a great extent—to a corporate structure and reporting system that incorporates social responsibility or environmental initiatives. This is a substantial increase over the 58% that agreed with this statement the previous year.
The survey data that informs this index reading was gathered from 407 respondents between July 5 and July 26, 2022.
About the RSM US Middle Market Business Index
The RSM US Middle Market Business Index (MMBI) is based on research of middle market firms conducted by Harris Poll, which began in the first quarter of 2015. The survey is conducted four times a year, in the first month of each quarter: January, April, July and October. The survey panel consists of approximately 1,500 middle market executives and is designed to accurately reflect conditions in the middle market.
Built in collaboration with Moody’s Analytics, the MMBI is borne out of the subset of questions in the survey that asks respondents to report the change in a variety of indicators. Respondents are asked a total of 20 questions patterned after those in other qualitative business surveys, such as those from the Institute of Supply Management and National Federation of Independent Businesses.
The 20 questions relate to changes in various measures of their business, such as revenues, profits, capital expenditures, hiring, employee compensation, prices paid, prices received and inventories. There are also questions that pertain to the economy and outlook, as well as to credit availability and borrowing. For 10 of the questions, respondents are asked to report the change from the previous quarter; for the other 10 they are asked to state the likely direction of these same indicators six months ahead.
The responses to each question are reported as diffusion indexes. The MMBI is a composite index computed as an equal weighted sum of the diffusion indexes for 10 survey questions plus 100 to keep the MMBI from becoming negative. A reading above 100 for the MMBI indicates that the middle market is generally expanding; below 100 indicates that it is generally contracting. The distance from 100 is indicative of the strength of the expansion or contraction.
RSM is the leading provider of professional services to the middle market. The clients we serve are the engine of global commerce and economic growth, and we are focused on developing leading professionals and services to meet their evolving needs in today’s ever-changing business landscape. Our purpose is to instill confidence in a world of change, empowering our clients and people to realize their full potential.
RSM US LLP is the U.S. member of RSM International, a global network of independent assurance, tax and consulting firms with 57,000 people in 120 countries. For more information, visit rsmus.com, like us on Facebook, follow us on Twitter and/or connect with us on LinkedIn.