ESG (Environment, Social and Governance) has become a major topic of discussion in the agendas of private and public organizations, including local authorities. But what is ESG and, more importantly, how can local authorities, with the hundreds of suppliers they interact with every day, use their procurement processes to bring about meaningful societal change?
The ESG measures the sustainability of an organization which, for local authorities, means the environmental, social and economic sustainability of its local community. Local authorities are working hard to reduce the impact of climate change and help us all adopt greener and healthier lifestyles. They add social value through the services they provide, such as health care and social services, and by building local economies that support local residents. They also have a social responsibility towards the local business community. They have a responsibility to cultivate good relationships with and between a diverse and inclusive range of local businesses, large and small. Helping businesses succeed will in turn create jobs in the community over the longer term. And local authority governance ensures that transparent processes and controls are in place to deliver and demonstrate sound decision-making and value for money.
To deliver the huge range of products and services for which they are responsible, from highway maintenance to social assistance, local authorities employ a list of suppliers. Last year they spent £64bn with third parties, including £23.6bn (almost 40%) with small and medium-sized enterprises (SMEs).
SMEs are an essential part of our national and local economies and the key to a thriving local community. They provide 60% of jobs in the private sector. These employees boost an area’s economy and support the local authority by spending locally and reducing pollution and environmental impact by walking, cycling or taking a shorter commute to work. . SMEs are also very committed to their local communities, using local suppliers and supporting local charities. Despite all this, four-fifths of SMEs fail in the first year, and two-thirds in ten years.
SMBs are often outsourced to larger companies, many of which are signatories to the prompt payment code. Yet SMEs are still waiting an average of 37 days, usually 60 days and in some cases up to 120 days to be paid, leading many to insolvency. Having survived the pandemic, they now face rising inflation and labor costs, coupled with supply chain restrictions, meaning they need more funding from rolling to survive. It’s no surprise that the mental health of small business owners is now a concern.
So how can a local authority support its local small business community and provide the ‘Social’ element of its ESG engagement? Perhaps the biggest impact anyone in the public sector can have by supporting local businesses is paying those businesses on time. They can prevent businesses from failing and take the stress out of late payments by paying quickly or even sooner, creating a more vibrant, sustainable and resilient local economy. The CBI says instant payments could free up £60bn in revenue for small businesses and boost 460,000 new jobs.
A local authority can take five steps to support its ESG program:
• Whenever possible, actively choose to work with local suppliers who bring social value to their community by directly stimulating local economies. Local SMEs often bring ESG value through their close community ties while offering both equal service and product quality.
• Explore new payment technologies to monitor payments. Digital systems provide authority oversight and governance and encourage large SME contractors to pay on time or in advance.
• Pay suppliers in 10 days or less and as part of the bidding process, encourage large suppliers to do the same. Digital payment platforms are available that allow smaller suppliers to accept discounts for early payment. They also help SMBs focus on growing their business and workforce rather than chasing late payments.
• Create supply chains that improve relationships between large companies and SMEs. Use digital payment technology platforms that improve communications, help increase cash flow, and reduce fear of losing future work by seeking payment too much. Building long-term, sustainable relationships will reduce stress for business owners, improve their well-being and ultimately that of their employees.
• During the procurement process, encourage organizations large and small to demonstrate a long-term commitment to the sustainability of the region. Small businesses are more innovative and adapt more quickly to changes in the Sustainable Development Goals. They can improve production and process efficiency and reduce their environmental footprint faster than large companies. Large and small businesses working together are likely to achieve much more social value than working alone.
If local authorities take these five steps, there are benefits for everyone: they will protect the health and well-being of local business owners and their employees; large companies will be able to demonstrate greater social value through cooperation; and local authorities will be able to show that they are delivering on their ESG commitments for the environment, social good and governance.
Anthony Persse is CEO of Optimum Finance & Saltare.