How startups can start integrating ESG

Focus on ESG or all hands on the building and growth deck?

Do startups, which frequently are just trying to survive, have time to think about ESG? Or should founders build their business first and worry about ESG later? According to Bruce Simpson and Cait Brumme in their Harvard Business Review (HBR) article:

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Yes, they should. Startups can build it right from the start, avoiding costly rework later.

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The HBR study explains that startups must understand the significant risks and opportunities specific to their industry, which is precisely what a thoughtful ESG strategy offers.

Here are 3 steps for startups to begin their ESG journey

A) Start with purpose:
One of the key question to answer: “What would the world lose if the startup disappeared?” Could competitors easily replace it or is there something unique it brings which customers will pay for, which is embedded deeply in your core strengths and value proposition?

Fun fact: Employees feeling their personal purpose can be lived at work are four times more likely to be engaged.

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B) Marry purpose with ESG:
ESG does not equal purpose or impact. While purpose is your north star, ESG is focused on how a company is operated and what sustainability risks it is facing. The objective is to quantify the latter from a broad sustainability perspective across environmental, social and governance factors.

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C) Identify material risks:
This is one of the key challenges as there is no blue print especially for tech companies. Overall you need to identify the (ESG) risks that are material to your startup’s specific sector/business. A good starting point can be the @SASB, or other, materiality assessment frameworks to identify those risks.
A good example is data privacy as a material risk in the EdTech space. Startups risk losing important government contracts as a recent Human Rights Watch report on the EdTech sector exposed that many were selling personal data to advertisers that they had collected from minors using their education apps, falling foul of the most basic privacy expectations under the ‘G’ (Governance) bucket of ESG.

Material risks to prioritize

Whatever sector startups are in, the research suggests the following short list of material risks should be prioritized:

• On E: startups must have target on carbon/ natural resource footprint

Only 7% of startups have a net zero plan. And yet it’s a top priority for investors who themselves are under the greatest regulatory pressure for transparency in this area. Investors can’t meet their climate targets unless the companies they invest in do.

• On S: Startups must build a strong social contract with employees, including “living” wages, an inclusive culture and support mental health

The battle for talent has never been more intense due to the severe labor shortage. S is the single most important ESG dimension to employees in the United States.

• On G: startups need diverse boards and solid date security rules

Investors will increasingly insist that the firms they fund have diverse boards. G is the most publicly visible ESG metric investors can track

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ESG value drivers

If done right, companies that manage to outperform their peers on ESG can capture 5 value sources: lower risk, cost of capital, and regulatory intervention, and higher growth, talent attraction and retention. Startups develop a competitive advantage from building purpose and ESG into their DNA from the start.

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Read the full HBR article here and follow us on Linkedin for more condensed and ad-hoc content around ESG, impact and sustainability regulation in Venture Capital and Private Equity.

Any questions or seeking further advice around the topic? Just reach out to us, we are happy to help!

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