Does ESG implementation influence performance and risk in SMEs?

Abstract

The relationship between Environmental Social and Governance (ESG) activities and financial performance has been explored within large companies. The presence of these activities in Small and Medium Enterprises (SMEs) is still in its early stages in the literature, requiring further empirical evidence. Given the importance of SMEs in economy and based on Stakeholder Theory, a set of hypotheses regarding the influence of ESG on financial and risk performance has been tested using a sample of 538 Spanish SMEs. Specifically, an index has been developed to assess ESG at both global and individual levels. The study analyses the impact of these variables on corporate performance, taking into account factors such as the pandemic period, level of disclosure and the size effect. The results demonstrate the importance of developing and index tailored to measuring ESG within this type of company, as the methodology employed can impact the outcomes. Moreover, at the individual level, all dimensions reflect a significant relationship, but the overall ESG score does not. The social and labor dimensions prove to be the most beneficial indices for enhancing resilience during periods of crisis. Finally, the findings confirm that it is more difficult for SMEs to monetize the results of ESG investment and that disclosing these activities has a positive impact. This study contributes to existing knowledge by constructing a robust measure of the level of ESG implementation and quality, providing valuable insights for SMEs on how to effectively manage their ESG activities.