Why Startups Need ESG?

Today, most companies have committed to improving their environmental, social, and governance (ESG) performance. However, more often than now ESG initiatives are still seen as a cost or compliance obligation, rather than a benefit or source of positive return on investment (ROI) for companies. 

Some argue that ESG is a distraction for startups with limited resources. So should startup founders prioritize building their businesses and address ESG later?  

Actually, startups have a unique advantage over larger companies when it comes to ESG. Unlike established companies with an entrenched culture and products that may need to be reworked to comply with ESG principles, startups can build their business aligned with ESG from the beginning. This article will discuss why and how startup founders should launch their ESG journey sooner rather than later.

Evidence shows a clear-defined purpose has many benefits, especially for startups. Purpose answers questions such as “What would the world lose if the startup disappeared?” and “Is there something unique that the startup brings those other competitors couldn’t easily replace?”. Furthermore, when personal (staff, consumers, investors) purpose aligns with the company’s purpose, they are four times more likely to be engaged. A purpose-driven startup inspires stakeholders, helps the company focus its efforts, and guides decision-making during difficult moments.

But Purpose without ESG is not measurable, strategic, or anchored in the business. It’s just a feel-good statement without substance. Conversely, ESG without Purpose is just a laundry list of initiatives without any clear focus on the crucial topics underpinning the startup’s strategy.

Through pairing Purpose with ESG , startups can identify the key elements they choose to “win” on and ensure that they are operating in a socially responsible and sustainable manner. This combination can inspire stakeholders, help the startup focus its efforts, and make trade-offs in moments of truth. For example, an e-commerce startup may focus on packaging and carbon emissions, while a manufacturing business may prioritize energy efficiency and waste disposal. 

Incorporating ESG early on is crucial for startups to raise capital. ESG alignment is becoming a prerequisite for funding opportunities . More and more investors are showing reluctance to support non-sustainable businesses. According to research by Charles Stanley, it’s expected that almost half of UK investors (48%) are looking to increase their ESG investments over the next three years. Larry Fink, the CEO of BlackRock , emphasized that future unicorns will be startups that prioritize sustainability and contribute to decarbonization and affordable energy transition. 

With forthcoming legislations in the EU and UK on sustainable products, funding could become harder to obtain for non-ESG-aligned startups as banks increasingly scrutinize sustainability and ESG policies as a condition of lending. Therefore, even if startups decide not to align with ESG, they may find it increasingly difficult to avoid it if they need to raise capital.

Apart from looking more attractive to funders, adopting ESG provides other benefits for start-ups. Embedding the principles of ESG may help startups reduce costs, attract talent, enhance revenue, mitigate risks, shape business strategies and optimise working culture.

Focusing on the environmental elements of ESG may help reduce your waste and energy consumption, potentially leading to reduced bills. ESG concentrates on the sustainability of your business within your product or service, the supply chain and start-up operations. Optimising these factors in line with sustainable practices can help reduce your waste and energy consumption. For example, installing energy-efficient measures, such as renewable energy sources, could reduce your energy bill by 18-25%, according to the Department for Business, Energy and Industrial Strategy.

Having ESG policies may prove effective in recruiting and keeping staff. Research by Anthesis found that 53% of workers believe a company’s sustainability is an important factor when choosing a company to work for. The same study found that 40% of the UK workforce surveyed were disappointed in their current employer’s lack of sustainability efforts.

Ensuring your business complies with diversity and inclusion criteria under ESG can help attract a more diverse employee pool – and that can be good for your business. Creating open and inclusive workplace cultures is an important business benefit and can attract customers and employees.

Companies that avoid short-term solutions and focus on the consumer and environment may boost their reputation and edge over the competition. An ESG-centred business can boost brand awareness and capture the attention of consumers. The Mckinsey research found that customers are willing to pay more for ‘greener’ brands. Over 70% of people said they would pay an additional 5% for a green product if it met the same standards as non-green alternatives.

Founders need to identify and manage key risks that could have a significant impact on their business. These risks include Environmental risks such as climate change, greenhouse gas emissions, and resource consumption etc; Social risks such as EDI violation, human rights violation, workplace health and safety etc; Govenrance risks such as ESG compliance, corporate misconduct, corruption etc.  It’s essential to prioritize material risks that are specific to their industry or sector. For instance, startups in Tech should focus on data privacy concerns.  Startups in energy sectors need to focus on environmental risks, such as oil spills or GHG emissions.

Rather than trying to address all risks at once, ESG alignment empowers startups to focus on a few crucial areas that have the potential to cause significant financial harm, if not managed effectively.

Alignment with ESG principles can also provide a unique selling point that sets your company apart from competitors. For instance, marketing a product from a sustainable source and with recyclable packaging can increase sales and improve your brand’s reputation in the eyes of customers and investors.

Furthermore, smaller-scale ESG initiatives can also engage customers and improve brand loyalty. For example, recycling programs and after-sales repair services are ways to encourage customers to participate in a positive ecosystem. It’s worth noting that even smaller ESG initiatives can have a significant impact and help startups build a positive reputation in the market. In the long run, incorporating ESG policies from the outset can result in operational savings and reduce the costs of retrofitting policies in the future.

There is no doubt that incorporating ESG policies come with additional costs. This can make cost-conscious startups hesitant to embrace them. The current economic climate, compounded by the impact of the pandemic, has only heightened this problem. A recent report by Azets SME Barometer Spring 2022 revealed that 71% of SMEs across different sectors in the UK, Denmark, Finland, Norway, and Sweden are slowing down their routes to ESG alignment for the very same reason.

However, navigating ESG does not have to be a daunting or costly prospect. At Version 28 , our groups of ESG experts have developed a process that helps guide SMEs and startups through the areas of ESG. It provides the greatest business impact, deliver them and measure ESG success in the most cost-effective and resource-efficient way.

Our cases show ESG policies can lead to cost savings. For instance, executing ESG effectively can help combat rising operating expenses. McKinsey research has found ESG can help reduce operating profits by as much as 60 per cent.

Startups also need to remember: the purpose of ESG isn’t investing in an ESG report. It’s investing in all the initiatives inside a company that lead to business benefits and better ROI . For example, HP generated $3.5 billion of commercial sales in 2021 from “new sales in which sustainability criteria were a known consideration. The average cost of a corporate data breach or consumer privacy violation incident is estimated at around $4 million, which can be easily prevented by an effective ESG policy.  

Ultimately, embracing ESG policies can lead to greater transparency, better risk management, and increased opportunities for funding and growth for startups. It is neither wise nor possible for startups to sit on the margin because of their size or business model. 

ESG should not be a box-ticking exercise. Done right the process will make startup businesses more successful and better placed to deal with change.

Get in touch with Version28 ’s ESG team for a free consultation and start your ESG journey today. 

The post       Why Startups Need ESG? first appeared on Version28.