Family Businesses and ESG
Martin Kemp, Family Business Research Foundation
18 April 2024
In the last decade, Environmental, Social, and Governance (ESG) considerations have taken precedence over Corporate Social Responsibility (CSR) as the primary framework for understanding the environmental and social responsibilities of businesses. This shift has brought the concept of sustainability into focus, drawing attention to how businesses are governed and managed with regard to their social and environmental impact.
Over this period, there has been an upsurge in ESG-related policies, regulations, rating systems, and frameworks. These have been designed to encourage businesses to operate more sustainably and to enhance their social and environmental impact. The growing availability of ESG indices and data, coupled with a growing expectation that firms report on their ESG-related activities, have made ESG a key commercial consideration.[1] Consequently, ESG has become a factor in firm valuation, risk assessment, underwriting, lending, and investment decisions.[2]
The governance aspect of ESG has garnered considerable attention in family business research, both in the UK and internationally.[3] However, the environmental and social dimensions have perhaps received less attention to date.
Family businesses make a significant contribution to major western economies, a fact that is now well-documented. In the UK, Oxford Economics have estimated that family firms employed approximately 13.9 million people in 2020.[4] A study conducted by the Family Business Research Foundation (FBRF) in collaboration with PwC estimated that family businesses in the UK contributed around £225bn to the UK public finances in 2021.[5]
According to Litz and Stewart [6], firms with higher levels of family involvement report higher levels of engagement in community activities. Research by the FBRF on the community impact of family businesses in the UK showed how they are deeply embedded in their local communities and have an impact that often extends beyond philanthropy and charitable giving.[7, 8]
In addition to social impact and community engagement, addressing climate change and reducing carbon emissions are central to ESG. In 2021, the UK Government published its Net Zero Strategy outlining how the UK economy will achieve net-zero greenhouse gas emissions by 2050.[9] This was followed in March 2023 by the UK Net Zero Growth Plan.[10]
Currently, only large companies in the UK are required to report their energy use and carbon emissions annually. While there are no reporting requirements for SMEs, voluntary guidance is available.
The UK’s 2021 Environment Act sets legally binding targets and environmental regulations for the improvement of air and water quality, recycling, preventing deforestation, and wildlife protection. These are relevant to firms of all sizes.[11]
EU regulations and policies also impact many UK firms with substantial operations, markets, and supply chains in EU countries. The EU’s Corporate Sustainability Reporting Directive, introduced in January 2023, expands ESG reporting requirements. It mandates businesses of all sizes to disclose climate change-related risks and to collect sustainability data across their supply chains.[12]
National and international environmental and climate-change policies present a myriad of questions and challenges for UK family businesses. These include: understanding the impact of these regulations and reporting requirements on their operations; the challenges they face in measuring and reporting their carbon emissions and broader social and environmental impact; and how family firms’ tendency to adopt a long-term orientation [13] shapes how they respond to environmental issues such as climate change. Furthermore, family businesses must navigate through times of complexity, crisis, and change, and manage exogenous shocks such as the COVID-19 pandemic, financial crises, and rapidly rising costs.
ESG considerations may also serve as a tool to engage the next generation of business families in the family business. As highlighted in PwC’s 10th Global Family Business Survey, “purpose and meaning are vital to this generation, and ESG can provide both” [14, p.14]. A study by Campden Research [15] suggests that many business families view net zero as a commercial opportunity. Moreover, according to PwC, firms with the highest ESG ratings recovered more quickly and performed better during the COVID-19 pandemic.[14, p.3]
Despite these potential benefits, sustainability and ESG may not always be prioritised in the strategies and operations of family-owned businesses. Drawing on evidence from their 10th Global Family Business Survey, PwC pointed to a “risk that established approaches and ways of thinking, particularly regarding what sustainability means and how family businesses are governed, could hold them [family firms] back. For now, they are not prioritising ESG or sustainable practices”.[14, p.11]
While there is plenty of guidance available for business managers, owners, and boards on ESG matters,[16-18] there is limited guidance specifically tailored to the circumstances and needs of family businesses, the majority of which in the UK are SMEs.[4] Over the past decade, many countries have produced national governance codes and guidance designed specifically for family firms or unlisted companies. In a systematic review [3] of this guidance, the FBRF found that it typically covers family governance and corporate governance, with governance issues relating to environmental and social issues either left out altogether or framed in terms of the external environment and governance of stakeholder relationships.
To date, there has been little research or guidance available on ESG focusing specifically on family firms. Therefore, the FBRF has launched a new programme of research on ESG and family business. This work aims to review the existing evidence in the area, assess its relevance to the UK family business sector, carry out new primary research on ESG in family-business contexts, and, finally, produce new evidence-based guidance tailored to family businesses, taking into account their particular circumstances and needs.
As an initial step, the Charity has commissioned a review of existing research and guidance on ESG in family firms to inform future research in this area, working in collaboration with family business researchers at three UK universities (Leicester, Loughborough, and Lancaster).
More information about the project can be found on the Family Business Research Foundation’s website: www.fbrf.org.uk/news/new-research-on-family-business-and-esg
REFERENCES
1. Gjergji, R, Vena, L, Sciascia, S, Cortesi, A. The effects of environmental, social and governance disclosure on the cost of capital in small and medium enterprises: The role of family business status. Business Strategy and the Environment. 2021; 30: 683–693. Accessed April 17, 2024. https://doi.org/10.1002/bse.2647
2. See for example, Moody’s (www.moodys.com/web/en/us/capabilities/esg.html) and Refinitiv’s ESG database (www.refinitiv.com/en/financial-data/company-data/esg-data).
3. Howoth, C. & Kemp, M. Governance in Family Businesses - Evidence and Implications. IFB Research Foundation; 2019. Accessed April 17, 2024. www.fbrf.org.uk/reports/governance-implications-evidence
4. IFB Research Foundation and Oxford Economics. State of the Nation: The UK Family Business Sector 2021–22. IFB Research Foundation; 2022. Accessed April 17, 2024. www.fbrf.org.uk/reports/state-of-the-nation-22
5. PwC and Family Business Research Foundation. Total Tax Contribution of UK Family Businesses. Family Business Research Foundation; 2023. Accessed April 17, 2024. www.fbrf.org.uk/reports/total-tax-contribution-of-uk-family-businesses
6. Litz, R.A., & Stewart, A.C. Charity Begins at Home: Family Firms and Patterns of Community Involvement. Nonprofit and Voluntary Sector Quarterly, 2000; 29(1): 131-148.
7. Glover, J. & Trehan, K. Family Business and Community Engagement. IFB Research Foundation; 2020. Accessed April 17, 2024. www.fbrf.org.uk/reports/family-business-community-engagement
8. Glover, J., & Trehan, K. What is the Social-economic Contribution of Family Firms in the UK? A Review of the Evidence. Enterprise Research Centre; 2020. SOTA Review No 45. Accessed April 17, 2024. www.enterpriseresearch.ac.uk/publications/social-economic-contribution-of-family-firms-in-uk-review-of-the-evidence-sota-review-no-45/
9. Department for Business, Energy and Industrial Strategy. Net Zero Strategy: Build Back Greener. 2021. Accessed April 18, 2024. https://assets.publishing.service.gov.uk/media/6194dfa4d3bf7f0555071b1b/net-zero-strategy-beis.pdf
10. Department for Energy Security & Net Zero. Powering Up Britain—The Net Zero Growth Plan. HM Government; March, 2023. Accessed April 18, 2024. https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1147457/powering-up-britain-net-zero-growth-plan.pdf
11. Business in the Community (BITC) have produced a useful factsheet summarising the implications of the 2021 Environment Act for UK business: www.bitc.org.uk/fact-sheet/what-does-the-environment-act-mean-for-business/
12. Pike, O. What companies within and outside of the EU can expect of new European ESG regulations. Thomson Reuters; May 4, 2023. Accessed April 18, 2024. www.thomsonreuters.com/en-us/posts/esg/csrd-esg-regulations/
13. Clinton, E. et al. Long-Term Thinking in UK Family Business. An IFB Research Foundation Working Paper; 2018. www.fbrf.org.uk/reports/long-term-thinking
14. PwC. From trust to impact: Why family businesses need to act now to ensure their legacy tomorrow. 10th Global Family Business Survey. PwC; 2021. Accessed April 18, 2024. www.pwc.com/gx/en/family-business-services/family-business-survey-2021/pwc-family-business-survey-2021.pdf
15. Beech, J. Families embrace sustainable ESG investing as a business opportunity and a family value. Campden FB; September 26, 2021. Accessed April 18, 2024. www.campdenfb.com/article/families-embrace-sustainable-esg-investing-business-opportunity-and-family-value
16. KPMG. ESG, Strategy and the Long View: a Framework for Board Oversight. KPMG; 2017. https://assets.kpmg.com/content/dam/kpmg/lu/pdf/lu-en-esg-strategy-framework-for-board-oversight.pdf
17. Chartered Governance Institute of UK and Ireland’s ESG Resource Hub. https://www.cgi.org.uk/knowledge/subject-resource-hub/esg
18. Guidance on ESG matters from The Corporate Governance Institute. www.thecorporategovernanceinstitute.com/insights/#guides