Environmental, Social & Governance (ESG) issues are firmly on the board agendas of large, publicly-listed companies. 2021 marks the year in which VC-backed startups need to follow suit. What is the best way to achieve this change? 

Some smaller companies have already made the move. A recent survey (1) of pre-seed and series A startups found that almost two thirds already have some ESG policies in place. Of those who didn’t, over half were now seriously considering them.  

Startups can benefit from an ESG focus for three key reasons: a higher chance of investment, attracting better talent and risk mitigation.

 

Increased investment

Over the last five years there has been an explosion in VC funds focusing on startups in the ESG space. One such fund is DBL Partners. They are currently looking to raise $450m for their fourth fundt. Their mission involves investing in companies which provide capital returns while also enabling environmental and social benefits. 

More recently, an increasing number of non-ESG focused VC firms are embedding ESG values into the companies they invest in. For example, Christine Tsai, CEO of 500 Startups, one of the most active global early stage venture capital firms whose “unicorn investments” include Credit Karma, Canva, Grab and Talkdesk, said that startups should implement ESG early on (2)

If startups want to stand out, they should embed ESG policies into their business model, principles and culture at the beginning rather than trying to “retro-fit” policies later under the pressure of investors or others. 

 

Top talent attraction and retention

Startups with ESG values embedded in the business are more attractive to the best talent. This gives them a tangible competitive advantage.

Millennials currently make up 50% of the global workforce (3). A recent study (4) found that more than 40% said they had joined a firm because they performed better on sustainability. The same study showed that they are 70% more likely to stay longer if they feel the company has a strong sustainability plan. 

However, relying on ESG policies and reporting (internally and externally) alone is not enough to benefit. Startups need to embrace a culture of openness at the core of their business. They must be honest to their stakeholders about their ESG weaknesses as well as their strengths. Only then will their ESG communications be authentic and have real impact on talent attraction and more importantly retention. 

 

Risk mitigation 

ESG policies can de-risk young companies as policy adoption becomes more difficult as they grow. A recent white paper (5) argued that startups are even more vulnerable to negative reputational impacts compared to more established firms, given their relatively small size and high growth characteristics.

For example, German fintech success story Wirecard shook the financial world earlier this year as it became clear that over $2bn was missing from their balance sheet (6). Also, in late 2019, it was reported that the CEO and founder of luggage startup AWAY, which had raised over $31 million, openly bullied and belittled her employees (7). This led to a media backlash against the company which greatly impacted their growth and market position.

With stronger governance policies and procedures, these scandals may have been avoidable. Startups which embed strong governance policies early on are much less likely to run into such issues.

How to integrate ESG into a VC-backed startup

It can be difficult for founders to decide which ESG policies to apply, which areas to focus on and how to communicate their outcomes authentically to stakeholders. Yet this is something which investors and top talent are increasingly looking for.  

ESG action plans should follow a staged approach, with a roadmap assessed and realigned at each funding round:  

  • Map your current ESG strengths 
     Work out what you are already doing right, supported by resources such as the Sustainable Accounting Standards Board Materiality Map to work out which ESG policies and metrics are relevant for your industry. Also, map out the ecosystem of the different stakeholders your company interacts with, including customers, suppliers, regulators and employees. 
  • Develop your goals and measure your progress
     Collect the relevant data to work out your current baseline and decide goals for the short, medium and long term, building a dashboard incorporating relevant Key Performance Indicators (KPIs) to track progress. ESG standards are complex and can need a multitude of different data points depending on the type of industry.  
  • Communicate your position
    Regularly collect and communicate your ESG data to relevant stakeholders including investors, employees, regulators, consumers and the media. Publish your ESG successes and milestones on your social media channels and your recruitment page. You might also want to consider inviting in third party auditors to validate your ESG data and methods of collecting it, and look into external certification e.g B-corp status. 

This brief overview may not answer all your questions. 

If you would like to hear more about how we can help VCs and startups manage, improve and communicate their ESG impact please get in touch. 

 1. 500 Startups (2020) Survey results: The Impact of Covid-19 on the Early-Stage Investment Climate,  https://survey.500.co/investor-survey-report-download/
2.
Venture Capital Journal (Jun 2020) 500 Startups makes ESG top of mind going forward,https://www.venturecapitaljournal.com/500-startups-makes-esg-top-of-mind-going-forward/
3.
KMPG (2017) Meet the millennials https://home.kpmg/content/dam/kpmg/uk/pdf/2017/04/Meet-the-Millennials-Secured.pdf
4. Fast Company (Feb 2019) Most millennials would take a pay cut to work at a environmentally responsible company,https://www.fastcompany.com/90306556/most-millennials-would-take-a-pay-cut-to-work-at-a-sustainable-company
5. CDC investment works & FMO Entrepreneurial Investment Bank (Jan 2020) Responsible venture capital Integrating environmental and social approaches in early-stage investing,  https://assets.cdcgroup.com/wp-content/uploads/2020/01/16092500/Responsible-Venture-Capital.pdf
6. Markets Insider (Jun 2020) How $2 billion vanished from the balance sheet of Wirecard, according to a forensic financial expert,
https://markets.businessinsider.com/news/stocks/wirecard-scandal-numbers-financial-forensic-expert-breakdown-2020-6-1029332810
7.
The Verge (Dec 2019) Away’s founders sold a vision of travel and inclusion, but former employees say it masked a toxic work environment, https://www.theverge.com/2019/12/5/20995453/away-luggage-ceo-steph-korey-toxic-work-environment-travel-inclusion

 

 

 

 

Startups can benefit from an ESG focus for three key reasons: a higher chance of investment, attracting better talent and risk mitigation.

If startups want to stand out, they should embed ESG policies into their business model, principles and culture at the beginning rather than trying to “retro-fit” policies later under the pressure of investors or others.”

“ESG policies can de-risk young companies as policy adoption becomes more difficult as they grow.”

Ben Bilefield

Ben Bilefield

Leading Point

Environmental Social & Governance (ESG) and Sustainable Investment

Client propositions and products in data-driven transformation in ESG and Sustainable Investing.

Dishang Patel

Dishang Patel

Start Ups and Scale Ups Advisor

Responsible for delivering digital FS businesses.

Transforming delivery models for the scale up market.

Upcoming blogs:

 

This is the fourth in a series of blogs that will explore the ESG world: its growth, its potential opportunities and the constraints that are holding it back. We will explore the increasing importance of ESG and how it affects business leaders, investors, asset managers, regulatory actors and more.

 

Artificial Intelligence: the Solution to the ESG Data Gap? In the second part of our Environmental, Social and Governance (ESG) blog series, Anya explores the potential opportunities surrounding Artificial Intelligence and responsible investing.

 

Riding the ESG Regulatory Wave: In the third part of our Environmental, Social and Governance (ESG) blog series, Alejandra explores the implementation challenges of ESG regulations hitting EU Asset Managers and Financial Institutions.

 

How Leading Point can help

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Bringing clarity to your company’s ESG data


By using our cloud-based data visualisation platform to bring together relevant metrics, we help organisations gain a standardised view and improve your ESG reporting and portfolio performance.  Our live ESG dashboard can be used to scenario plan, map out ESG strategy and tell the ESG story to stakeholders.

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Accelerating the collection of ESG metrics using AI

AI helps with the process of ingesting, analysing and distributing data as well as offering predictive abilities and assessing trends in the ESG space.  Leading Point is helping our AI startup partnerships adapt their technology to pursue this new opportunity, implementing these solutions into investment firms and supporting them with the use of the technology and data management.

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Assisting companies to implement upcoming EU ESG regulations

Implementing ESG regulations and providing operational support to improve ESG metrics for banks and other financial institutions. Ensuring compliance by benchmarking and disclosing ESG information, in-depth data collection to satisfy corporate reporting requirements, conducting appropriate investment and risk management decisions, and to make disclosures to clients and fund investors.

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