Addressing ESG governance requirements for sole proprietorship SMEs in Nigeria

With the world grappling with rising temperatures, sea levels, and intensifying climate change, Environmental, social and governance (ESG) practices have become special tools for mitigating these challenges. Global initiatives like the Nationally Determined Contribution (NDC) reinforces commitment to achieving net-zero greenhouse gas emissions, with focus on high-emission sectors such as transportation, energy, and manufacturing.

US-based Anthony Izuagie an
MBA student, Dillard School of Business Administration, Texas shared insights into his discovery.

Since the Paris Accord, ESG principles have increasingly influenced business finance with lenders and investors favoring enterprises committed to sustainability. In Nigeria, the Sustainable Banking Principles introduced in 2012 require that banks integrate environmental and social considerations into decision-making processes. Similarly, angel investors and private equity firms prioritize ESG compliance when evaluating potential investments, recognizing the long-term value and profitability these practices generate during investment exits.

The Nigerian Stock Exchange mandated listed companies to disclose their ESG activities annually by focusing on environmental sustainability, employee welfare, and transparent governance. Furthermore, the Financial Reporting Council of Nigeria (FRCN) has issued guidelines encouraging SMEs to adopt sustainable reporting. With these commitments, sole proprietorship SMEs will face a herculian task of meeting ESG governance requirements, particularly under the revised Companies and Allied Matters Act (CAMA,2020) which permits incorporation by a single director/shareholder. This raises concerns about governance oversight, strategic planning, and compliance for such businesses.

Measures such as fostering transparent decision-making processes, establishing robust governance systems, conducting regular financial audits, ensuring regulatory compliance, and leveraging boutique ESG service providers will help to overcome this structural limitations. With these in place, sole proprietorship SMEs can align with ESG standards and practice, access critical funding opportunities, and position themselves for long-term sustainability and growth in the global marketplace.

Amid these fantastic demands for ESG practice like constituting a board of directors, strategic planning and board committee oversight, risk management, ethical and integrity standards, crisis management, and business continuity, and relating it to the revised Companies and Allied Matters Act which permits incorporation by a single director/shareholder, we can conclude that SMEs are liable not to conform effectively with the governance requirement.
For this reason, we look at how SMEs can overcome this limitation through.

Transparent decision-making: SMEs must structure the other parts of their governance mechanism such as having a strong management team with the responsibilities of making decisions. The responsibility of a company rests on the Board of directors, so in the absence of a board especially for sole proprietorship SMEs, this limitation can be overcome by creating other management structures to ensure transparency and accountability in the firm. It is said that two good heads are better than one, though most sole proprietorships are cautious about protecting their investment however they can encourage transparency through regular administrative meetings and documentation of the decision-making process.
Established systems: This includes a system of governance and other systems for managing risk such as internal controls. A common misconception of sole proprietorship SMEs is that the business survives on the knowledge of the funders because they understand the business model and have the passion to drive it. Small businesses require more than an expert knowledge of the business process. They are expected to develop sales systems, accounting systems, advertising and marketing, recruitment and staffing systems etc. well articulated systems will are hallmark of transparency and risk management.
Consistent financial audits: Most Nigerian SMEs don’t find it convenient to prepare their books. Some owners believe it exposes their business secrets to intruders, others lack the knowledge to engage in this process while others are compelled by covenants and regulations to write up their books. The last group that writes books usually doesn’t do so regularly. It is a great advantage for SMEs to write books because accounting is the language of business. Accounting helps to capture the data that will reflect the profitability, liquidity, and business sustainability.
Compliance with regulations: This is very important for sole proprietorship SMEs where the owners have the notion, that I am my boss and no one can dictate for me, thus in the situation of I am my own boss, the willingness and ability to comply with regulation that strengthens risk management and transparency is below average. In Nigeria, small businesses are expected to file annual returns with the Corporate Affairs Commission (CAC) yearly, they are expected to register with the Federal Inland Revenue Service (FIRS) for value-added taxes (VAT) remittance, register with the States Internal Revenue Service for Pay As Your Earn(PAYE) and withholding (WHT) tax remittance. Realistically, this entails so much to do for SMEs but for those that meet this requirement, they enjoy so many privileges over those that default. Importantly, compliance validates the ethical practices of a firm therefore sole proprietorship SMEs should make compliance a priority because this can help to amplify its commitment to ESG practices.
Use of boutique ESG service providers: Like big firms that enlist services of boutique ESG service providers, sole proprietorship SMEs can seek the services of small ESG boutique service firms to support their ESG reporting and advisory. Similar to the services of auditors and tax advisers to SMEs, enlisting the services of ESG service providers will help overcome the challenges of developing and implementing an ESG strategy.
As the deadline for reporting gradually draws closer, sole proprietorship SMEs can begin to brace for the task ahead by paying attention to the points above to achieve compliance by 2030. There is urgent need for sole proprietorship SMEs to embrace environmental, social and governance practices to remain competitive and sustainable in the global scheme of doing business.