You’re Not Too Early: ESG for Startups
“We’re building an impactful climate solution – we don’t need to worry about ESG.”
“Our investments are too early stage to think about ESG.”
“We struggle to see basic financial reporting from our companies, let alone a new dataset.”
I’ve heard these responses from founders and venture capitalists when asked whether they do any ESG reporting. You’re not alone if you’re wondering what ESG even means – the acronym is shorthand for environmental, social, and governance performance.
The skepticism comes from a belief that startups need to be singularly focused on growth and an assumption that ESG is only a material concern for highly regulated public companies. There is indeed widespread adoption of ESG transparency in the public markets. The SEC has proposed mandatory climate disclosure, and 92% of the S&P 500 already publish sustainability reports.
Expectations are nevertheless changing for private companies, and ESG standardization efforts are underway. The ESG Data Convergence Initiative brings together GPs and LPs representing $4T in AUM to align on ESG reporting standards for private equity. VentureESG and ESG_VC are working toward ESG alignment and adoption in venture capital.
But aren’t startups too early?
Not anymore. Customers, employees, and investors increasingly expect startups to measure and manage ESG as a dimension of business performance.
Customers expect greater transparency and vote with their wallets. Concerned by climate change and inequality, consumers are aligning purchasing decisions with personal values. In fact, 2/3 of all consumers, and 90% of Gen Z consumers, are willing to pay more for sustainable brands. B2C companies, like Allbirds, are placing sustainability at the core of their operating and marketing decisions for competitive differentiation. B2B companies are no longer exempt, with larger corporations facing pressure from regulators, investors, and their own customers to provide supply chain transparency. If a public company is disclosing Scope 3 emissions, smaller companies in their supply chain then have to share their own emissions data.
Startups compete for top talent and oftentimes cannot win on the salary offer alone. Mission and impact are important differentiators that do not require cash. 86% of employees prefer to work for a company with shared values, and the majority of Gen Z would accept lower pay for better values alignment. Retention rates are also higher when the company shares environmental and social beliefs, lowering turnover and recruitment costs for the company.
ESG management can also affect investor returns. Early product design and operating decisions determine resource intensity. Water, energy, and waste all have price tags, and carbon prices penalize emissions. Sustainable operations position the company to scale more efficiently and profitably. Sound ESG management also lowers the reputational risk for a company. WeWork is a recent example of the valuation risks associated with poor corporate governance. Allegations of racist or sexist cultures can deter future customers, owners, or employees.
Startups still don’t have time.
Large corporations and asset managers have entire teams and outside consultants dedicated to ESG. Startups are lucky to have part of one person’s time to work on sustainability or diversity. Venture investors really do struggle to gather portfolio financial data, and financial reporting has been around far longer than ESG.
Fortunately, ESG is not all or nothing. Startups can start small, and Metric offers a free tier of access to measure carbon emissions and corporate diversity in less than 20 minutes. Our platform guides companies to focus on the decisions that offer cascading benefits as the company scales. For example, we recommend that seed-stage companies check job descriptions for biased language and share the posting beyond the founders’ personal networks. The company accesses a broader pool of talent and finds candidates that add to the company culture, creating a more diverse early core that improves the likelihood of diversity and inclusion at scale.
Venture funds are pivotal for portfolio ESG performance. Investors can share best practices and lessons learned from other investments. Funds can sign master service agreements with providers to lower costs for sustainability and diversity solutions. Beyond a source of capital, VCs can provide operational value and help founders find competitive advantage through ESG management.
Move fast and build things.
Customer acquisition, employee recruitment, and investment returns support the microeconomic business case for ESG management. The macroeconomic business case is just as pressing. Startups need a healthy system to compete and grow, but the cascading challenges of climate change, inequality, and democracy erosion create instability. Corporate philanthropy is not a scalable answer. New business models, norms, and products hold the promise of aligning sustainability, equity, and profitability. Measurement is just the first step.
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https://www.qualtrics.com/blog/company-values-employee-retention/