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What it’s about: Sustainability criteria, also known as ESG (Environmental, Social, and Governance), are a comprehensive set of guidelines for evaluating companies’ sustainable and ethical practices. They have now become an integral part of management, even for small and medium-sized enterprises. On the one hand, there are clear expectations from customers, suppliers, investors, and employees. On the other hand, a number of laws and regulations require companies to provide information and report in accordance with ESG criteria.
ESG can therefore also have a significant impact on working capital financing. Yvonne Hummel, branch manager at Oberbank AG in Leipzig, explains: “Companies with strong ESG performance are more attractive to banks and financial institutions. They often receive better loan terms and can choose from a wider range of financing options.”
Due to the implementation of the EU Action Plan (2019), the topic of “sustainability” will become an even more important factor in determining a company’s future creditworthiness and its ability to secure financing from financial institutions.
The Importance of ESG in Business Sales— Identifying and Assessing ESG Risks and Opportunities
The integration of ESG factors has also become crucial when preparing for business succession or a company sale. Alexander Reichel, managing partner at Oakstreet Munich, emphasizes: “Investors, as well as traditional individual successors, are paying increasing attention to how well companies manage ESG risks and capitalize on ESG opportunities. This applies just as much to large medium-sized companies as it does to smaller businesses in the skilled trades and retail sectors.” Without a demonstrable ESG strategy, this leads to significant pressure on the purchase price or, ultimately, to the company becoming unsellable. No buyer or successor wants to end up stuck with a company that has failed to address such a critical issue.
The Role of ESG in Working Capital Financing— ESG Performance and Financing Options
Financial institutions are eager to finance companies that also place a high priority on ESG—not least because of their own sustainability reports.
This is already reflected in the process of determining a customer rating, in which the following or similar questions now often play a role:
• What changes in climate and legal regulations related to ESG (e.g., CO₂ tax, bans) could impact your business model or your industry?
• Have you already implemented measures to limit CO₂ emissions, or do you have plans to do so?
• What strategies do you have in place for the disposal, recovery, and optimal recycling of your products after use?
• What climate-neutral alternatives are you already exploring for machinery, your vehicle fleet, procurement, and energy supply?
• How does your company ensure employee protection and rights, and what measures do you implement to foster employee retention and development?
Companies that have already formulated answers to these questions and a clear strategy receive a better rating and, consequently, a higher credit rating. In addition, investments in sustainability can be financed more affordably through grants or interest subsidies.
Best Practices for Integrating ESG
It is therefore recommended that every company build up the necessary in-house expertise, seek support from specialized consultants, and integrate supportive measures into its day-to-day operations. The entire workforce should also be made aware of these issues.
To reap the benefits of strong ESG performance, companies should consider the following best practices:
1. Be sure to integrate ESG into the corporate strategy: ESG should not be viewed merely as a separate compliance task, but as part of the company’s core strategy.
2. Improve risk management: Identify ESG risks and develop concrete strategies to minimize them.
3. Meet investor requirements: Take into account the growing demand for ESG-compliant companies and adapt your corporate strategy accordingly. Publishing your ESG strategy on the company website is also highly beneficial.
Outlook and Trends— The Future of ESG in Business Succession and Financing
ESG will continue to gain importance as investors and regulatory authorities focus more strongly on sustainable practices, even among small and medium-sized enterprises. Companies that integrate ESG into their strategies will be better positioned in the future to optimize the sale of their business and tap into favorable financing opportunities. Additional, significant benefits:
• Cost reduction: Focusing on sustainable business processes can help operate them much more cost-effectively, particularly in terms of energy and resource consumption. In the medium to long term, this can improve profitability and increase the company’s value.
• Greater appeal to skilled workers and executives: Sustainable companies are more attractive not only to existing employees but also to new hires. Employees’ identification with the company and its business practices increases. Trust in forward-looking corporate management can be more easily anchored in concrete and visible sustainability measures.
• Risk mitigation: Sustainable business management, in particular, reduces potential risks arising from environmental damage or violations of social standards. A negative public image and harmful market perception can be avoided precisely through sustainable practices and transparency.
• Competitive advantages: Sustainable companies generally have easier access to customers and investors and often enable the development of new business areas.
• Laws and regulations: Even though a number of today’s ESG regulations are still aimed at capital market-oriented or larger companies, a clear trend in regulation is also evident for small and medium-sized enterprises (see the Supply Chain Act), which require companies to report on their sustainability performance or comply with specific sustainability standards. This is the only way to avoid sanctions and penalties in the long term—or to deliberately take advantage of support measures and incentives.
The bottom line— take ESG seriously!
ESG is not just a buzzword, but a decisive factor for success in business sales and working capital financing. Sustainable business practices will not only help solve environmental and social problems but also strengthen the company economically and make it more successful in the long term.
The best time to start is: Now!
