Startups are often just trying to survive – why do they have time to worry about ESG? Yes. That’s because they need to be aware of the material risks and opportunities in a given industry, which is essentially a careful ESG strategy. Startups should start by identifying their goals, then marry those goals to ESG considerations – for example, by identifying risks to avoid and manage. All startups should consider their carbon footprint, make sure they treat their employees well, and have a diverse board overseeing them.
Over the last five years, the corporate world has increasingly focused on implementing stakeholder capitalism through Environmental, Social and Governance (ESG) principles. However, is ESG a distraction for cash-strapped and time-constrained talent? Should founders build their business first and worry about ESG later?
On the contrary: start-ups have an advantage over large companies that are “installed base” assets, products and culture often need to be undone to be consistent with ESG principles. Startups can build it right from the start, avoiding costly rework later. And they can do this in a way that accelerates the urgent search for product-market fit versus distracting from it.
This is a novel approach for founders to launch their ESG journey.
Start with a Purpose
The goal crystallizes the unmet needs of a startup to solve and the unique advantages it brings to do that. Objective Answer: “What would the world lose if it started to disappear?” Is it easy for competitors to replace it or is there something unique that customers will pay for, that is deeply embedded in their core strength and value proposition? The goal is more than that branding and PR. When employees feel their personal purpose can live at work, they are four times more likely to be engagement. It inspires stakeholders, helps companies focus their efforts, and makes trade-offs in moments of truth. Startups often benefit from a strong sense of purpose due to their proximity to the founder’s initial passion for solving the world’s problems.
Purpose marriage with ESG
ESG is different from Purpose. The ESG framework suggests How You run your business to deliver your goals, and strategy, and What exposure you have to certain risks. It provides an implementation framework to guide business decisions. Goals without ESG are neither measurable nor strategic. It’s not anchored in business. On the other hand, ESG without a goal is not concerned enough on some crucial topics underpinning our startup strategy. This is just a laundry list. The goal is to help founders identify the multiple dimensions that startups choose to “win” versus just being good citizens.
Identify Material Risks
Founders should start by identifying key risks to avoid and manage. George Serafeim’s jizz A 2015 study confirms that businesses should focus first on the risks that MATERIAL to a specific sector/business of a start-up. SASB and other frameworks help identify the material’s 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 important government contracts as of late Human Rights Watch report about Print The sector revealed that many are selling personal data to advertisers that they collect from children using their educational apps, violating the most basic privacy expectations in ESG’s ‘G’ (Governance) bucket.
Whatever the startup sector, our research shows a short list of material risks that should be prioritized because they can have a high financial impact when done wrong and because they overlap with “typical” startup priorities.
In E: startups must have a target on carbon / footprint of natural resources.
Only 7% of startups have a net zero plan. But it is a top priority for investors who are themselves under the greatest regulatory pressure for transparency in this area. Investors cannot meet their climate targets unless the companies they invest in do so. Startups can easily track basic resource usage through utility bills. Building net zero muscle early allows startups to build sustainability into their supply chain as they scale. This also protects against the reputational risk of poor supply chain control, avoiding what Darling started Harvest daily to face today.
In S: Startups must build a strong social contract with employees; including ‘living’ wages, inclusive culture, and support for mental health.
In an environment of severe labor shortages, the battle for talent has never been more intense. Companies that pay a living wage have 30% lower attrition during this Great Recession period. Today it is the most important ESG dimension for employees in the United States. Meanwhile, 40% of the workforce complained of burnout and other mental health challenges. Inclusive culture is against this. Any successful founder with more than two employees has promoted different perspectives and a strong sense of belonging. WeWork and Uber’s recent challenges are important reminders of the negative impact of toxic cultures.
In G: startups need a variety of boards and rock-solid data security rules.
More, investors will demand startups they invest in have a variety of boards. It is the most visible ESG metric that the general public can track, so it is usually built into the initial due diligence process and included in the target itself. Furthermore, increased board diversity correlates highly with strong business performance.
Startups also need to build on solid rock data security and privacy rules. Startups have blown customer trust most often through negligence on data security / privacy, triggering increased regulatory scrutiny in this area. Note the EdTech example above, and I am a nurseThe healthcare startup is shutting down in 2022 after a data breach that affected 1.7 million patients.
Companies that excel in ESG tap into five source of value: low risk, cost of capital, and regulatory intervention, and higher growth, talent attraction and retention. Startups develop a competitive advantage by building Purpose and ESG into their DNA from the start.
The purpose of helping to inform ‘offence’ in some selected areas of distinctiveness. ESG helps inform “defenses” in material categories. In all cases, startups must cover specific bases including climate targets on E, strong social contracts on S, and diverse governance and strong data processes on G. Optimally, the founder must clarify “who” is accountable for implementation, prioritizing again with metrics . , and report progress to their board along with other priorities.