Startups are often just trying to survive – do they have time to worry about ESG? Yeah. That’s because they need to be aware of the material risks and opportunities in their industry, which is essentially what a solid ESG strategy provides. Startups should start by identifying their purpose, then align that purpose with ESG considerations—for example, by identifying risks to avoid and manage. All startups need to consider their carbon footprint, make sure they treat their employees well, and have various oversight boards.
Over the past five years, the corporate world has become increasingly focused on implementing shareholder capitalism through environmental, social and governance (ESG) principles. However, is ESG a distraction for cash-strapped talent and time-strapped startups? Should founders build their business first and worry about ESG later?
Quite the opposite: startups have an advantage over larger companies in that their “installed base” of assets, products and culture often has to be overturned to be ESG-compliant. Startups can build it from scratch, avoiding costly rework later. And they can do so in a way that accelerates the immediate search for product-market fit versus derailing it.
Here’s a new approach for founders to start their ESG journey.
Start with a goal
Purpose crystallizes a startup’s unmet need and the unique strengths it brings to fulfill it. “What would the world lose if the startup disappeared?” the target replies. Can competitors easily replace it, or is there something unique that customers are paying for that is deeply embedded in its core strengths and value proposition? The goal is much more than branding and public relations. Employees are four times more likely to be engaged when they feel their personal purpose can be lived at work. It inspires stakeholders, helps the company focus its efforts and trade off at moments of truth. Startups typically benefit from a strong sense of purpose, given their closeness to the founders’ initial passion to solve a problem in the world.
Aim to marry ESG
ESG is different from purpose. ESG frameworks suggest How You run your business to achieve your goals and strategy. And Are you exposed to certain risks? It provides an operational framework to guide business decision making. Purpose without ESG is neither measurable nor strategic. This is not Connected In business, on the other hand, ESG is not without purpose is concentrated Enough about a few important issues underlying startup strategy. This is just a laundry list. Purpose helps founders identify the few dimensions the startup chooses to “win” versus just being a good citizen.
Identification of material risks
Founders should start by identifying key risks to avoid and manage. Basic research by George Seraphim in 2015 emphasized that efforts should be focused first on risks that Materials to a specific sector/business of a startup. The SASB and other frameworks help identify these important ESG risks. Startups should start there and try not to boil the ocean. Failure can be the end. For example, data privacy is a material risk in the EdTech space. Dozens of startups are at risk of losing important government contracts as a recent Human Rights Watch report on the EdTech sector found that many of them are selling personal data to advertisers that they have collected from minors using their educational apps, beyond the most basic expectations. Privacy protection under the title “. G’ (Governance) ESG bucket.
Whatever sector startups are in, our research shows that the following short list of material risks should be prioritized because, if done wrong, they can have a high financial impact due to their high overlap with the priorities of a “typical” startup.
In E: Startups must have a carbon/natural resource target.
Only 7% of startups have a net zero plan. And yet, for investors who are themselves under the greatest regulatory pressure for transparency in this area, it is a top priority. Investors cannot achieve their climate goals unless the companies they invest in do. Startups can easily track resource usage through utility bills. Building net zero muscle allows startups to build sustainability in their supply chain as they scale. It also protects against reputational risks from poor supply chain control, avoiding what beloved startup Daily Harvest is facing today.
In S: Startups must build a strong social contract with employees. including a ‘living’ wage, inclusive culture, and mental health support.
In an environment of severe labor shortages, the war for talent has never been fiercer. Companies that pay a living wage have 30 percent less attrition during this period of mass resignations. Today, it is the most important ESG dimension for employees in the United States. Meanwhile, 40 percent of the workforce complains of burnout and other mental health challenges. Inclusive cultures counter this. Any successful founder with more than two employees promotes diverse perspectives and a strong sense of belonging. The past challenges of WeWork and Uber are reminders of the negative impact of toxic cultures.
In G: Startups need diverse boards and strong data security rules.
Increasingly, investors The startups they invest in want a diverse board. This is the most visible ESG metric that investors can track, so it’s usually built into their due diligence processes and included in their goals. Furthermore, increased board diversity is strongly associated with stronger business performance.
Startups must also comply with data security and privacy laws. Startups have often eroded customer trust by neglecting data security/privacy, leading to increased regulatory scrutiny in this area. Consider the EdTech example above and myNurse, a healthcare startup shut down in 2022 after a data breach affected 1.7 million patients.
Companies that perform better in ESG tap into five sources of value: lower Risk, cost of capital and regulatory intervention and higher Developing, attracting and retaining talent. Startups create a competitive advantage from building Purpose and ESG into their DNA from the start.
Purpose helps inform “offense” in a few select areas of distinctiveness. ESG helps inform the “defence” in material categories. In all cases, startups must cover certain bases, 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 for execution, set priorities with metrics behind them. and report progress to their board along with other priorities.
