MMBI special report

2021 Environmental, social and governance report

The rise of ESG initiatives in the middle market

Oct 05, 2021

The growing importance of environmental, social and governance issues has reached an inflection point in the middle market, according to proprietary research from RSM US LLP. Stakeholders’ increased focus on ESG will continue to present immense business opportunities for organizations that position themselves to adapt to these shifting priorities.

Familiarity among middle market executives with the use of ESG criteria to evaluate the performance of businesses, organizations and/or investments rose significantly in the third quarter of 2021, compared to the fourth quarter in 2019, according to the third-quarter RSM US Middle Market Business Index survey, which polled executives from July 8 through July 26 on ESG- and climate change-related questions.

In the last part of 2019, 39% of executives were very familiar or somewhat familiar with using ESG criteria to evaluate performance, and in Q3 2021, that figure was 69%. And the rise of ESG is about more than just awareness—a majority of survey respondents indicated that their organizations are taking action to incorporate these issues into their operations.

While ESG initiatives encompass a wide range of issues, those focused on the environment are of paramount importance, especially as more consumers and businesses factor sustainability into their buying decisions and as the Biden administration has prioritized net-zero emissions targets and other environmental goals. As such, pressures and shifts related to climate change continue to shape business planning for the future.

Many companies anticipate climate change will also present opportunities over the next three years. Twenty percent of respondents said climate change presents significant opportunities, with a notable gap based on size cohort; 9% of smaller middle market companies see significant opportunities, while that figure was 28% for larger middle market companies. Overall, 28% of respondents said climate change presents significant challenges, and 27% said it presents both significant opportunities and challenges.

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RSM marks its ESG journey

Fostering strong social connections has been integral to the culture at RSM, whose deep ties to the communities it serves date back to its founding as a small Midwestern firm nearly a century ago.

Today, against the backdrop of heightened awareness around racial and gender equity, income inequality, the environment and other growing social issues, the firm is taking steps to drive change, including putting a growing emphasis on environmental, social and governance (ESG) initiatives and developing the means to track progress within the firm. The firm published its first diversity report this year.

RSM has a long history of stewardship, which we define as leaving things better than we found them. This applies to our firm, our community and the world in which we live.
Doug Opheim, RSM chief financial officer and chairman of the RSM US Foundation

To that end, RSM earlier this year launched the Middle Market Collaborative for Understanding, a group that brings together senior middle market executives from RSM’s client roster to discuss diversity, equity and inclusion. It also sponsors six CEO Action for Racial Equity Fellows, who are working to advance racial equity through policy and business leadership.

“RSM has an established program to foster a culture of diversity, equity and inclusion within our firm,” says Tracey Walker, RSM national leader of culture, diversity and inclusion. “We were pleased to add these external programs to further engage our client base and support broader action to advance equity in our nation.”

RSM has recently turned its attention to environmental strategies and is currently completing work that entails baseline measurements of its environmental impact, defining goals and deploying programs across its offices to ensure consistency and continuous improvement.

As the research in this MMBI special report shows, midsize organizations are now wellversed in ESG, and ready to embrace social and environmental business initiatives increasingly demanded by investors, customers, employees, vendors and other important stakeholders. These moves have not only proven to be good for society, but in the end, they make for better business.

“The significant challenges we have seen in our society during the last 18 months due to the COVID-19 pandemic, racial injustice, extreme weather events and more have left a lasting impact,” says RSM Principal and Communications Leader Sara Webber Laczo. “They have made business leaders open their eyes to the importance of ESG—asking not only what they can do to make their business more successful but also more sustainable in the future. At RSM, we’re committed to doing our part for the mutual benefit of our firm, clients, people and the communities and world in which we operate.”

Learn more about RSM's approach to ESG

An ESG roadmap

Awareness about environmental, social and governance among middle market companies is greater than ever, RSM US Middle Market Business Index data shows. But translating awareness into action is more difficult, says Anthony DeCandido, an RSM partner and senior financial services analyst whose specialties include helping midsize organizations develop ESG strategies.

In the middle market, it’s rare that someone is defined as an ESG or sustainability officer. Somebody is doing this in between their day job.
Anthony DeCandido, RSM partner and senior financial services analyst

More often than not, a company’s chief financial officer, marketing leader or human resources representative is assigned to carry the ball. DeCandido and his team can work with that individual to develop an ESG baseline by aggregating existing data from the company’s cloud-based enterprise resource planning (ERP) tools, HR data, supply chain records and the like, as well as from interviews with business unit leaders, suppliers and customers. Along with comparative information from other businesses in the space—the bulk of which is gleaned from public company disclosures—this creates a wellrounded picture of where the business stands on issues ranging from diversity to fair trade and carbon emissions.

“We gather that information through an exercise called stakeholder mapping,” he says. “It lets us determine who cares and why.”

This so-called “rapid assessment” can be completed in a matter of weeks, DeCandido says. It offers transparency for the C-suite and the board and allows the business to build a foundational plan toward achievable ESG goals, which typically begins with the issuance of an ESG report for stakeholders.

Says DeCandido: “They get an outline, a road map of the immediate actionable items, as well as the things they should do in the short, medium and long term.” 

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