Environmental Social Governance (ESG) For Startups

Environmental Social Governance (ESG) is an evaluation model measuring a company’s performance vis a vis the people around it, its environment, and its responsibility. ESG refers to the three essential criteria for evaluating the sustainability of a business.

ESG factors are a subset of non-financial performance indicators that include ethical, sustainable, and corporate governance systems put in place to ensure accountability and sustainability. Businesses that adopt ESG standards tend to be more conscientious, less risky, and consequently more likely to be successful in their long-term commercial aims.

Environmental factors focus on preventing pollution, combating climate change, and creating sustainable energy. Environmental factors vary based on the business activities of a startup. For example, relevant environmental factors for an e-commerce startup may include the composition of packaging and carbon emissions across the supply chain.

Social factors of an ESG strategy consider how a company manages relationships with customers, suppliers, employees, and its community. It also looks at the company’s ability to stand for social good beyond its area of operation. Social factors relevant to nearly all startups include data protection, customer loyalty, employee working conditions, brand awareness and work culture.

The adoption of governance measures is concerned with how the company is governed and controlled, alongside decision making. Well-functioning governance can steer the company and management through difficult decisions, promote transparency, and help to safeguard the interests of the company and its stakeholders.

Why should you care about ESG?

From an investor’s standpoint, companies that implement ESG policies offer real advantages in terms of risk mitigation. Businesses that are socially responsible increase their appeal to investors and gain more trust and respect than those that do not apply ESG policies. Moreover, for a B2C startup, a focus on ESG can help build trust with consumers and distinguish it from competitors. This distinction will not only improve reputation but will also lead to positive press. Sustainable strategies, progressive social culture, and transparent corporate governance tend to make businesses less vulnerable to potential regulatory violations. ESG can create value, from increasing market share to acquiring and retaining talent, and reducing costs.

ESG policies improve productivity, as well as brand awareness and loyalty on the customer side. On top of that, it generates a lot of positive PR. Implementing ESG policies is one of the effective strategies to win the talent war, by attracting and retaining the best talent out there. For example, a company with high employee engagement and satisfaction will have ahigh retention rate.

What Can an Early-Stage Startup Do to Stay Ahead of The Curve?

• Identify and develop the right ESG factors that are relevant to your startup. As you focus on the operations of your startup and getting the product-market fit right, analyze the impact of your products and services on any of the ESG measures. Get all the data you need depending on the industry you are involved in and work towards implementing sustainable ESG policies.
• Once the ESG factors relevant to a startup have been identified, it will be necessary to determine how the company will measure those factors and report on performance to investors. Tracking ESG metrics provides a clear picture of the environmental and social impact of the startup.
• A startup's mission statement should be reflective of its ESG policies. It should reflect corporate values and leadership buy-in to ESG goals. Everyone must understand and have a good knowledge of their roles in achieving the ESG goals. It is also important to integrate any KPI into overall company management systems and goals. Sustainability measures should not be isolated but should be treated to be part of business strategy.
• ESG is a long game and it requires time to do it well. Playing the long game means adjusting your timescales and organizing your teams around holistic outcomes and not expecting immediate results.
• ESG data should be collected and communicated to investors, consumers, employees, and the media. Additionally, ESG successes and measures put in place to keep on improving should be communicated on social media channels. It can improve relationships with existing investors and simplify the diligence process for future investors.
• In the current business environment, startups need to adopt ESG policies from the get go. We understand that early-stage startups may not have enough resources and time, but implementing ESG principles and processes is not an unnecessary expense, it should be viewed as an innovative, sustainable investment in the sustainability and success of the business.