Startups are often just trying to survive – do they have time to worry about ESG? Yes. This is because they need to be aware of the material risks and opportunities in their given industry, which is essentially what a careful ESG strategy provides. Startups should start by identifying their purpose and then marry that purpose with ESG considerations, for example, by identifying risks to avoid and manage. All new businesses need to consider their carbon footprint, make sure they treat their employees well, and have diverse boards overseeing them.
Over the past five years, the business world has increasingly focused on implementing stakeholder capitalism through Environmental, Social and Governance (ESG) principles. Yet is ESG a distraction for cash-strapped talent and time-constrained startups? Should founders build their business first and worry about ESG later?
Quite the contrary: start-ups have an advantage over larger companies whose “installed base” of assets, products, and culture must often unravel to be consistent with ESG principles. Startups can build it from the ground up, avoiding costly rework later. And they can do this in a way that speeds up the urgent product-market search rather than distracts from it.
Here’s a novel approach for founders to kick off their ESG journey.
Start with Purpose
Purpose crystallizes the unmet need a startup is responding to and the unique strengths it brings to do so. Purpose replies: “What would the world lose if the startup disappeared?” Could competitors easily replace it, or is there something unique that you bring that customers will pay for that is deeply rooted in your core strengths and value proposition? Purpose is much more than brand and public relations. When employees feel their personal purpose can be lived at work, they are four times more likely to be engaged. It inspires stakeholders, helps the company focus its efforts and compromise at moments of truth. Startups often benefit from a strong sense of purpose given their proximity to a founder’s initial passion to solve a problem in the world.
Combine purpose with ESG
ESG is different than Purpose. ESG frameworks suggest What directs its business to fulfill its purpose and strategy, Y what exposure you have to certain risks. It provides an implementation framework to guide business decision making. Purpose without ESG is neither measurable nor strategic. It is not anchored In the business. On the other hand, ESG without purpose is not in focus enough on the few crucial issues that underpin the startup’s strategy. It’s just a laundry list. Purpose helps founders identify the few dimensions on which the startup chooses to “win” rather than just be a good citizen.
Identify material risks
Founders should start by identifying the key risks to avoid and manage. by George Serafeim seminal The 2015 research stressed that efforts should first focus on risks that are material to the specific sector/business of a startup. SASB and other frameworks help identify those material ESG risks. Startups should start there and try not to boil the ocean. Failure can be terminal. For example, data privacy is a material risk in the EdTech space. Dozens of startups risk losing major government contracts as recent human rights observer report on the Educative technology sector exposed that many were selling personal data to advertisers that they had collected from minors using their educational apps, breaching the most basic privacy expectations under segment ‘G’ (Governance) of ESG.
Regardless of which sector startups are in, our research suggests that the following short list of material risks should be prioritized because they can have a high financial impact when done wrong, and because they have a large overlap with “typical” business priorities. emerging companies.
In E: New companies must have a carbon footprint/natural resources target.
Only 7% of startups have a net zero plan. And yet it is a top priority for investors who are under the greatest regulatory pressure for transparency in this area. Investors cannot meet their climate goals unless the companies they invest in do. Startups can easily track usage of basic resources through utility bills. Building net-zero muscle early allows startups to embed sustainability into their supply chains as they scale. This also protects against reputational risk from poor supply chain controls, avoiding what the startup darling daily harvest is facing today.
In S: Startups must build a strong social contract with employees; including ‘living’ wages, an inclusive culture and mental health support.
In an environment of acute labor shortages, the war for talent has never been fiercer. Companies that pay a living wage have 30% fewer churns during this era of the Great Quit. Today, this is the most important ESG dimension for employees in the United States. Meanwhile, 40% of the workforce complains of burnout and other mental health issues. Inclusive cultures counteract this. Any successful founder with more than two employees is already promoting diverse viewpoints and a strong sense of ownership. Past WeWork and Uber challenges are stark reminders of the negative impact of toxic cultures.
In G: Startups need diverse dashboards and rock-solid data security rules.
Increasingly, investors it will require that the new companies in which they invest have diverse boards. It’s the most publicly visible ESG metric investors can track, so it’s typically integrated into their early due diligence processes and included in their own goals. Additionally, greater board diversity is highly correlated with stronger business performance.
Startups must also incorporate rock-solid data security and privacy rules. Startups have lost customer trust more often due to negligence in data security/privacy, prompting increased regulatory scrutiny in this area. Consider the EdTech example above, and My nursea healthcare startup shut down in 2022 after a data breach affecting 1.7 million patients.
Top-performing companies on ESG leverage five sources of value: lower risk, cost of capital and regulatory intervention, and higher growth, attraction and retention of talent. Startups build competitive advantage by embedding Purpose and ESG into their DNA early on.
Purpose helps report ‘offense’ in a few chosen areas of distinction. ESG helps inform “defense” in material categories. In all cases, startups should cover specific basics, including climate goals in E, a strong social contract in S, and diverse governance and strong data processes in G. Optimally, the founder should clarify “who” is responsible of implementation, support priorities with metrics. , and report progress to your board along with other priorities.