TAIPEI (Taiwan News) — Taiwan's environmental, social, and governance (ESG) landscape is already huge.

It is even daunting for Taiwan’s listed companies with their reporting obligations, despite their plentiful resources. However, if your company is one of the 1.59 million small and medium enterprises (SMEs) within Taiwan, as per the Ministry of Economic Affairs (MOEA) 2022 White Paper on Small and Medium Enterprises, then your task is no doubt even more daunting.

Taiwan’s SMEs are mistaken if they believe that there is no need for their own ESG program. Taiwan’s SMEs employ some 9.2 million people, representing more than 80 percent of Taiwan’s total workforce.

These same SMEs exceeded NT$26 trillion (US$817 billion) in total revenue in 2021. Taiwan’s SMEs play a vital role in the post-pandemic revitalization of Taiwan’s economy both domestically and internationally.

SMEs play an integral role in domestic and international supply chains and, being in a supply chain means that your company has an ESG impact, and your activities create ESG risks for those companies that rely on your supplies. The majority of your environmental footprint and your biggest social risks can be directly attributed to your place in the supply chain.

Unfortunately, well before ESG became an acronym, supply chains were never built with sustainability in mind, making them the prime candidates for infractions, reputational damage, greenwashing accusations, and operational challenges to a company's overall sustainability efforts. The supply chain is now of vital importance within ESG.

Customers

Customers care about where you get your materials and how they are handled. That is why leading manufacturers include ESG transparency in their sales strategies, and SMEs are going to have to do the same sooner rather than later.

Investors in listed companies

Imagine that your company, as an SME, supplies resources to a major listed company. Potential investors in that listed company have become a leading force in the adoption of ESG policies, and they will want to know, albeit indirectly, about your company when assessing whether to invest in the listed company.

Regulators

While Taiwan’s SMEs are not currently under sharp ESG focus by the Taiwanese regulators, the same cannot be said in the international arena, particularly within the European Union (EU). If you supply an EU company, regardless of whether you are a major listed company or an SME, you need to be prepared to provide evidence of how you manufactured your goods and that they meet international standards.

Environmental Footprint

It is a common misconception that being sustainable is all about managing your direct environmental footprint, such as greenhouse gases from facilities, or installing LED bulbs in your office. The reality for the vast majority of manufacturers is that the bulk of the environmental impact is actually in your supply chain and where you sit in that chain.

Although the emissions and energy consumption at your manufacturing facilities contribute to your environmental footprint, they pale in comparison to the total impact of your place within the supply chain and include activities, such as manufacturing, assembly, and shipping parts, or the hazardous substances in certain articles.

Climate Impact

As an SME, do you know the greenhouse gas emissions of your own suppliers? Do you know yours? Are there reduction targets in place? Are you and your suppliers using renewable energy? If not, what plans are in place to switch to renewable energy sources? The government’s 2050 Net Zero Pathway applies to all entities, large and small, and to all of Taiwan’s residents.

You need to know if there are any hazardous chemicals in your own production, and where those chemicals ultimately end up, either safely recycled or even in a landfill.

Social risks

It is a sorry fact but true, even in 2023, that the worst human rights issues can be hidden in supply chains. Climate change and other environmental performance indicators are important, but it is social issues that can do the most damage to your brand, and it is your reputation that matters the most.

Human rights issues can include slavery, forced labor, and child labor hidden in your supply chain. SMEs must ensure not to purposely or inadvertently source materials from conflict-affected areas, thereby financing sanctioned regimes. SMEs must be diligent to avoid bribery and corruption from business partners.

Even as an SME, it should be easy to ensure your own company does not employ unethical labor practices, but to be confident human rights abuses are not built into your product, you need deep visibility into your supply chain. You need to equip your company to be systematic in ensuring your company is not ensnared in a social scandal. No one in your supply chain is going to raise their hand and admit to using forced labor or bribing government officials, but you need to come up with some means of due diligence to ensure this is not the case.

Conclusion

ESG creates risks even when it is meant to reduce them, but like any risk, they need to be managed. It will be extremely difficult for Taiwan’s SMEs to create their own ESG programs. The government and MOEA, which touts Taiwan’s SMEs as the backbone of Taiwan’s stable economic development, will need to provide in-depth assistance, training, and perhaps even a template for SMEs to use, at least at the start of their ESG journey. Some 80 percent of Taiwan’s workforce is reliant on Taiwan getting this right.