ESG criteria is gaining importance in measuring company performance -- but are middle market businesses able to walk their talk?

Can you just redefine the purpose of something, like, for instance, business? The Business Roundtable did just that at the end of last summer. It said that the purpose of business was no longer to simply provide profits for shareholders. Instead the purpose was to provide benefits for employees, customers, suppliers, and the communities around a business — and the shareholders.

Certainly the biggest companies got the message, as many of the CEOs of those companies are part of the Business Roundtable. But what about small to medium sized businesses?

According to a new survey of middle market companies, they’re aware of the shift to broader responsibilities but haven’t fully executed on it themselves.

RSM’s Q4 2019 US Middle Market Business Index (MMBI) survey released recently takes the pulse of middle market companies’ views of social responsibility, diversity and inclusion, and environmental/social/governance (ESG) criteria. Although it was executed before the coronavirus pandemic, the issues it raises are as important now as they were in late 2019. And, many say, such issues as social responsibility and ESG in the corporate world are even more important now that the COVID-19 pandemic has ravaged nursing homes, families, hospitals, and caused a near halt of most countries’ economies.

The survey found that while middle market companies do rank delivering results to investors as important, with 68% of companies putting that as one of the top functions, they also say they have formalized plans for serving additional stakeholders such as customers (70%), employees (74%), suppliers (56%) and communities (55%).

Still when it comes to putting things in writing, which, arguably shows at least an attempt at a greater commitment to live up to those words, smaller middle market companies ($10 million to $50 million in annual revenue) are less likely to have those written objectives and metrics for success than larger middle market companies ($50 billion to $1 billion in annual revenue), the survey found.

“Smaller companies don’t yet feel the pressure to follow the broader push for corporate social responsibility, while larger businesses are more likely to be held accountable by stakeholders and typically have better resources in place to conduct a deeper level of analysis,” said Anthony DeCandido, partner and financial services senior analyst with RSM US LLP.

Middle market companies do support social and philanthropic causes, the survey found, especially in the communities where they operate. But only 39% of executives of middle market companies were familiar with using ESG criteria to rank and track their company’s activities — the same percentage from its survey in 2018.

However, familiarity does drive adoption, and of those 39% of executives who say they’re familiar with ESG criteria, 79% of them say they use it to evaluate the performance of their organization and 74% say they use it to measure the performance of other organizations.

The survey found that 84% of executives said they were focused on employee diversity, inclusion, and women’s issues in the workplace, but only 53% had a formal focus on it. In fact, women’s issues, the survey found, “notably lagged behind other priorities across the board, a striking finding given that women now comprise the majority of workers on America’s nonfarm payrolls.”

Only 46% of companies said they were focused on women’s issues, while 62% said they were focused on multicultural issues.

“As the demand and expectations for transparency and accountability in the business community continue to grow, it is imperative companies adapt to the new normal and bake ESG into their strategies,” said DeCandido. “Responding to these issues has become even more critical in the age of coronavirus, and middle market companies that invest the time and resources will not only stand out among the crowd, but will create long-term value for their shareholders and their communities.”

The RSM US Middle Market Business Index (MMBI) is a partnership between RSM US and the U.S. Chamber of Commerce and is built in collaboration with Moody’s Analytics; the survey panel of 700 middle market executives are polled quarterly by Harris Poll.