The acronym ESG (which stands for Environmental, Social, and Governance) has become one of the buzzwords pervading discussions across various media platforms and at conferences over the recent months and will definitely gain further traction in the years to come.

To put it succinctly, ESG refers to a set of criteria that investors, stakeholders, and customers use to evaluate a company's impact on the environment, its relationships with society, and its governance structure. By integrating ESG principles, businesses can enhance their long-term sustainability, mitigate risks, and foster a positive impact on the community.

It is widely acknowledged that a large number of family-run businesses in Malta are strongly lacking from a governance perspective, with barely any organisational set up in place and no board meetings on the agenda. Generally, corridor meetings are the order of the day. Integrating strong governance principles into succession planning would be the first step to creating a resilient framework for the proper governance of the family business, both in the immediate and long term.  The implementation of the governance precepts ensures that the incoming leadership is well-versed in and committed to maintaining robust governance practices, reducing the risk of legal and reputational issues.

Moreover, succession planning with a focus on ESG principles ensures that the ethical practices established by the current leadership are continued by the next generation. This continuity is essential for maintaining the trust of stakeholders and upholding the family business's reputation.

In addition to the above, there is the regulatory element to ESG which needs to be factored in. Contrary to widespread opinion, ESG considerations are not only relevant to regulated companies or the publicly listed entities but also to smaller businesses. Being ESG compliant will apply even indirectly and any notion that ESG regulation does not apply to a business because it does not meet the regulatory thresholds established at law to render such ESG regulation directly applicable to it needs to be done away with. By way of example, ESG regulation becomes indirectly applicable given that a larger business enterprise (to which ESG regulation applies directly) will need to show that entities within its supply chain (which could include smaller businesses not typically caught by ESG requirements) are compliant with ESG regulatory requirements. Therefore, not being ESG compliant could result in a business losing its competitive edge. . Apart from the possible knock-on regulatory effects, adopting ESG principles in succession planning can offer several benefits to these tight knit organisations. Primarily, the principles ESG postulates largely align with values held dear by a number of family businesses. Emulating and codifying these principles in succession planning will help preserve the values held dear by the heads of the business who, more often than not, implemented a number of these principles in practice.

Additionally, as the ‘E’ in ESG garners more importance globally, focussing on ESG compliance and implementing good environmental practices in business on a day-to-day basis may also help in encouraging the younger generation to take an active role in the family business.

Any business owner, whether a family business or otherwise, will want to ensure the success of a business. This is all the more relevant where it is a family business and ensuring continued success requires a business to be able to adapt, remain current, attract and retain talent and deal with an ever-changing regulatory environment. It is critical that family businesses recognise that ESG and succession planning are critical in ensuring this type of continued success. Apart from the elements outlined above, a strong ESG practice can be the hallmark of a company’s strength in being a business that is adaptable, ready to face regulatory developments, reputable and competitive in the face of continuously changing market trends. When this is tied in with proper succession planning, third parties engaging with the particular business can be confident that any transfer of leadership from one generation to the next will be done ethically, in a manner which ensures continuity with minimum upheaval resulting from such change and that practices which have garnered other parties’ trust will be maintained.

Authors: Simon Schembri, Philip Mifsud