By Luma Saqqaf
As the clock ticks down in the race to netzero, so the business world steps up its pace to align itself towards sustainable practices and incorporate more of its subset ESG into their business. But what exactly is ESG? Why is it important? And why does a startup need to get involved?
WHAT ESG MEANS
ESG stands for Environmental, Social and Governance and they are distinct criteria a company needs to consider on its path to sustainability. Environmental criteria includes a company’s impact on climate. Social criteria encompass a company’s relationship with its employees, suppliers, customers and communities. Governance looks at aspects of an organisation’s culture, structure, policies and procedures.
CHOOSING SUSTAINABLE GOALS
Every startup is different – and therefore you need to decide what criteria applies to you. An e-commerce company, for example, may choose a different delivery service to reduce its carbon emissions. A manufacturing business, on the other hand, may want to focus on energy efficiency and waste disposal and get more women on its board.
However, a word of caution: ESG factors are, by their very nature, wide ranging and can touch all aspects of an organisation – from workers’ wellbeing to pay gap reporting to the materials used in its manufacturing. It can be tempting to try to tackle everything at one go. Instead, a company starting on its ESG journey should focus on a few things it can do easily, do them well and take a long-term, 360 approach.
Even giant corporations opt for limiting their focus on a few goals in order to achieve better results. For example, pharmaceutical company GlaxoSmithKline committed to reducing their environmental footprint – reducing waste and emissions by 25% by 2030 – and also to gender diversity, with a board of directors made up of 40% of people who identify as women.
Another example is Apple, who focused on three main areas: reducing its impact on climate change, preserving precious resources and using safer materials in products and processes. Since setting those goals, it has taken various steps such as using renewable resources, designing long-lasting products and creating several wind and solar farms to power their data centres, retail stores and corporate offices.
THE FUTURE IS SUSTAINABLE
Sustainability is here to stay. Across the world governments and governing bodies are taking it seriously, introducing increasingly more detailed frameworks and regulations requiring businesses to report on how closely they are aligning to ESG principles.
Amongst the first off the block was the EU in 2020, followed by the UK and many other jurisdictions, who introduced several pieces of legislation focusing on getting business to disclose various sustainability aspects. For the moment, the majority of the regulation focuses on listed and large companies and does not yet apply to startups, but many believe it is just a few years away.
6 REASONS WHY A STARTUP NEEDS TO GET BEHIND ESG
ESG regulation may sound like a far-off move, especially for a startup founder working 24 hour days with other, seemingly more pressing things on their minds such as cash flow and raising capital. But these days it is never more prescient to get ahead of the curve. Here are six reasons why:
ESG opens up funding opportunities. These days two-thirds of investors surveyed for the Global Sustainable review see ESG criteria as core to their decisions and are becoming increasingly reluctant to back non-sustainable enterprises. The trend is being accelerated by taxonomies such as the EU which are beginning to demand that ESG risks be taken into account in investment decisions. In the same vein, shareholders are increasingly asking questions about their investments.
From an investor’s point of view, companies with ESG policies are more attractive in terms of risk mitigation. Sustainable organisations with cumulative progressive social policies and good corporate governance make businesses less vulnerable to regulatory violations, lawsuits and fines.
Regulation may become hard to avoid in the day-to-day business of a startup. As sustainability reporting starts ramping up, startups will soon find they have to consider their investors’ needs. Investors could ask your business to undergo ESG due diligence as a part of your funding process. You may also be required to provide them with your company sustainability related data to enable them in turn to satisfy their own reporting obligation.
ESG may improve and strengthen relationships with your buyers. Many companies are starting to create incentives for companies in their supply chain to follow sustainable practices. Software company Sales force, for example, now obligates its suppliers to adhere to certain sustainability requirements – any breach leading to a fine. Deutsche Bank now requires all prospective suppliers over a certain threshold to have a sustainability rating.
Thinking ESG may save you money. While initial investment into new low-impact materials and machinery may seem prohibitive at first, you will need to consider whether you are only delaying the inevitable. Consider off-setting these costs against long term savings such as becoming a paperless company, lowering your utility costs by switching to LED light bulbs and installing motion sensors that turn off lights and heating at night and weekends.
ESG may actually help you build a better, more cost-efficient company. As I’ve already mentioned, ESG by its very nature covers a wide range of business areas including finance, legal, compliance and staffing and looking at each of these through an ESG lens can help focus your strategic planning. If profit and progress on environmental and social fronts are joined together from the outset, they can become a natural business outcome, not an afterthought.
It can give you a profitable USP, give you an edge over your competitors and it can ultimately boost your bottom line too. More and more consumers are taking factors other than products or price into account and they pay attention to a brand in what it says, does and stands for.
While ESG principles are by no means a guaranteed recipe for startup success, the advantages they bring are considerable. By instilling ESG into the heart of everything they do, the nimblest startups may be able to jump off the starting blocks – and challenge their slower competitors.
Luma Saqqaf is a sustainable finance advisor assisting companies and funds to incorporate sustainability in their business.