Banks and big business are racing to get behind sustainable frameworks as the world sets its sights on net zero. But should startups feel the same urgency too?

You’ve got the business idea, the buzzy name, done the market research and drawn up a business plan. But before you press ‘go’ on looking for funding and finance, there is now an extra step you should consider adding to your to-do list: cementing your startup’s sustainability credentials. As the world races to become net zero, ESG – a number of topics to consider to help your company on the path to sustainability - is a term you are likely to hear more frequently. Day One of your startup is the best time to get in on the ESG act.

WHAT DOES ESG STAND FOR?

Environmental, Social and Governance elements to a sustainable business. Put simply, environmental criteria consider issues like how a company impacts the climate. Social criteria are about the positive relationship a company has with employees, suppliers, customers and communities. Governance refers to aspects of a company’s culture, structure, policies and procedures.

ESG policies will vary according to your type of business. For example, environmental factors for an e-commerce startup may include the type of packaging and carbon emissions across your supply chain. For a manufacturing business however, it may include the choice of ingredients or materials, energy efficiency and waste disposal. If your business sells ethically or sustainably sourced products, or employs persons with disabilities, or engages in philanthropy, it fulfills the social factors.

WHY ESG IS HERE TO STAY

Many countries led by the EU, UK and the US to name a few have already introduced regulations requiring companies to start disclosing how they deal with sustainability. These take the form of disclosure frameworks which examine which of the various sustainability factors can be applied to the company and, in many cases, how the company can impact them. These frameworks help companies not only align their sustainability strategy to their business model, but also reassess their management policies, the role of governing bodies and processes used to identify sustainability risks and opportunities.

At the moment banks, asset managers and financial institutions as well as listed and large companies will need to produce these sustainability reports. And while startups are not yet mandated to do this, many believe it’s only a matter of time before the spotlight falls on them.

INCORPORATING ESG INTO STARTUPS

So why do startups need to adopt ESG early on in their growth? Firstly and most importantly, ESG opens up funding possibilities.

These days investors are becoming increasingly reluctant to back non-sustainable enterprises.  As Larry Fink, CEO of BlackRock, pointed out in his 2022 annual letter: "The next 1,000 unicorns won't be search engines or social media companies, they'll be sustainable, scalable innovators – startups that help the world decarbonize and make the energy transition affordable for all consumers."

There will come a time when ESG becomes an integral part of any funding process. This 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.

Soon startups will not only have to undergo ESG due diligence as a part of their funding procedures, but also consider their investors' own ESG responsibilities as the demand for greater transparency in reporting ramps up. Further up the chain, investors of your own investors could also reach out down to you for ESG data. In the same vein, if your business model involves working closely with bigger companies - they may also want information from you for their reporting.

As Joann Regan, regional managing partner at Azets in the North East, noted, with legislation coming down the track for EU SMEs on sustainable products, funding “is likely to be harder to come by as banks increasingly look at sustainability and ESG policies as a condition of lending.”

Whether you decide your startup should be ESG-aligned or not, increasing regulation might make it increasingly hard for you to avoid it.

THE QUESTION OF COST

There’s no doubt that factoring in ESG policies into your business can incur extra expense. A ‘greener’ manufacturing process for example may be more expensive. Cost-conscious startups will be naturally more hesitant to get behind it. 

This reticence has been exacerbated by the pressures of operating in a cost of living crisis and the economic aftershock of a pandemic. Indeed a recent report by Azets SME Barometer Spring 2022, which surveyed 1,093 SMEs from all sectors in the UK, Denmark, Finland, Norway, and Sweden, highlighted that almost three quarters (71%) of SMEs are not reducing their carbon emissions or improving their sustainability performance, as digitalisation and employee wellbeing take centre stage.

A short-termist view, many would say - ESG principles can result in saving on operational costs in the long run. Easy wins for example include reducing your carbon footprint with cycle to work schemes, rethinking office materials and packaging and concentrating efforts on energy efficiency and water usage.

Startups will need to weigh up the cost of initial investment or risk incurring costs later as regulations start to bite.

USING ESG AS AN OPPORTUNITY

Getting on board with ESG from day one is also easier than paying more to retrofit policies when your company is more established. When your company is small and agile, you can create the right culture and mindset from the outset.

It can also give you a profitable USP that your competitors don’t have. Marketing your new range of ciders hand-pressed in the community and sold in a recyclable container, for example, will not only give your brand standout in a busy market place, but will infuse it with warm and fuzzy appeal which could lead to further sales. 

A worthwhile USP like this could also benefit your company’s reputation in the eyes of shareholders and customers. These days people are more conscious of their buying power, where they are spending their money and where they want to invest.  A Morgan Stanley survey from 2019 found that '86% of millennials are interested in sustainable investing, pursuing investments that more closely reflect the values they hold.'

And it doesn’t have to be big, costly pledges  - there are plenty of smaller ways to engage with your customers in a worthwhile way. For example collecting and recycling packaging of your product enables your customers to also be part of the positive ecosystem. Another way could be offering repair and after sales service which aims at durability and extending the life of the product.

In short, it is no longer possible for startups to sit on the margin because of their size or business model. And they don’t have to, there are many ways they can immediately contribute to a sustainable future before they are forced to do so by law.

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