Importance of ESG for Startups

With slogans like “There is no Plan(et) B” gaining popularity around the globe, business enterprises have evolved to focus on the 3 Ps (People, Planet, and Profit) and not just on Profits.

Popular buzzwords like “environmental sustainability” and “social governance” are becoming more relevant to the business world, including startup enterprises. This is driving the emergence of Environmental, Social, and Governance (or ESG) in the business strategies of small and large companies alike. ESG-related policies have been adopted by over 60% of startups, while venture capitalists have increased their funding for ESG startups over the last five years.

Startup entrepreneurs are looking at ESG issues as building blocks for business success among today’s environment-conscious consumers. Middle-aged millennials are now spurring the growth in ESG ventures, with one-third of them investing in companies that factor in ESG issues (as compared to only 19% of Gen-Z consumers and 2% of the older “baby boomer” generation). 

What is ESG?

Speaking at the World Economic Forum at Davos, Nasdaq CEO, Adena Friedman, points out that, “2020 is increasingly looking like it may be the ‘tipping point’ year for ESG investing.”

ESG is primarily composed of the following three blocks:

Environmental

Where the startup enterprise focuses on environmental issues including climate change, air or water pollution, sustainable energy sources, and human health. These issues can vary depending on the business domain of the startup (for example, emission testing for car manufacturers or packaging material used in E-commerce startups).

A 2019 Morning Star report concluded that over 70% of Americans across generations have expressed moderate interest in sustainable investing. By reducing their environmental footprint, startups can thus attract customer interest and eliminate penalties due to any violations.

Social

Where the startups focus on a range of social factors related to inclusiveness, diversity in the workforce, working conditions, and safety measures for protecting customer data. Examples of socially conscious businesses include CSR initiatives, local community relations, philanthropic activities, “clean” financial records, and employing persons with disabilities.

An example of a negative “social” factor is the 2019 case of Steph Korey, CEO of AWAY luggage startup, who faced a media backlash following her verbal bullying of employees. On the other hand, a positive social image can lead to better employee productivity, customer loyalty, and healthy public relations.

Governance

Where the startups focus on better governance including their business policies, transparency, investor relations, and accounting. Companies with good governance indicate a healthy corporate culture, thus attracting more investors and job applicants. Apart from low employee turnover and high compensation, governance focuses on the accountability of higher management (or board of directors).

An example of a company with poor governance is that of biomedical startup Theranos which earned millions through a breakthrough in blood testing, which was later revealed to be a major scandal.

How do startup enterprises benefit from adopting ESG-friendly policies? Let us discuss their benefits.

4 Reasons why Startups must embrace ESG?

No matter which industry domain, ESG-conscious companies stand to benefit from these policies. Here are 4 reasons why every startup must embrace ESG:

  1. More investments

Speaking to the Venture Capital Journal, Christine Tsai, CEO of 500 Startups, emphasizes why startups must embrace ESG early on in their business journey. Apart from this venture investment company, many investors are now funding startups that provide environmental and social benefits.

As a startup business, you stand to gain more funding and investments by embedding ESG policies into your company culture and business model right from inception. On the other hand, modern investors look at non-ESG compliant companies as unsafe investment destinations as they are at higher risk of facing compliance-related litigations, bad PR reputations, or social backlashes.

  1. Talent attractions and retention

ESG-friendly policies are effective in attracting and retaining the best of young talent. A recent study found that over 40% of millennials would prefer to work for companies that are committed to environmental sustainability and social values. With millennials comprising 50% of the global workforce in 2020, startups need to cater to their core values and embrace an ESG culture right at the core of their operations.

Additionally, ESG-centric policies can also help in retaining the existing workforce. Around 70% of the millennials are likely to stay with employers with whom they share a common vision – while another 70% would even take a pay cut to work with an environment-conscious company.

  1. Better brand reputation

A 2021 Consumer Intelligence Series survey conducted by PwC found that 83% of consumers believe companies should follow the best practices in ESG, while 76% of the surveyed consumers plan to discontinue their association with companies that poorly treat the environment, employees, or the local community.

Startups with ESG policies can easily build a good brand reputation through positive PR. Through press coverage of its environment-friendly policies, early-stage startups can increase their brand awareness and their brand appeal to potential consumers. Additionally, ESG investment companies can also establish brand trust and increase their overall appeal to their consumer base.

  1. Lower risks

Given their smaller business size, startups are more vulnerable to market risks and negative brand perceptions when compared to larger and established companies. Financial frauds or negative media coverage can permanently damage newer companies that lack a strong “brand heritage” or values to fall back on.

ESG-compliant startups can go a long way in reducing market risks and scandals through better governance and practices. An added advantage is that smaller enterprises are flexible enough to inculcate ESG practices.

Conclusion

To be competitive and successful in today’s market conditions, startups need to adopt ESG-friendly policies early on from their inception. Businesses failing to be ESG-compliant can suffer from a negative brand perception among consumers, investors, and employees. There are tremendous business benefits of adopting ESG policies – and they can shape the future of our business world and environment.
You may also like to read our blog on how startups can increase the odds of long-term sustainability.

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