Growing Importance of ESG Strategy for Investors and Startups

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Growing Importance of ESG Strategy for Investors and Startups

With slogans like “There is no Plan(et) B” gaining popularity around the globe, business enterprises have evolved to focus on the 3 Ps (People, Planet, and Profit) and not just on Profits.

Popular buzzwords like “environmental sustainability” and “social governance” are becoming more relevant to the business world, including startup enterprises. This is driving the emergence of Environmental, Social, and Governance (or ESG) in the business strategies of small and large companies alike. ESG-related policies have been adopted by over 60% of startups, while venture capitalists have increased their funding for ESG startups over the last five years.

The private equity market has also started to robustly include sustainability and ESG criteria into its portfolio strategies. Private investors have realized that investing in companies with a robust and convincing ESG strategy positively affects ROI, reduces lending and revenue risks. ESG performance ratings and reports show investors a company’s efforts to mitigate risks and generate sustainable long-term financial returns.

Startup entrepreneurs are looking at ESG issues as building blocks for business success among today’s environment-conscious consumers. Middle-aged millennials are now spurring the growth in ESG ventures, with one-third of them investing in companies that factor in ESG issues (as compared to only 19% of Gen-Z consumers and 2% of the older “baby boomer” generation). 

What is ESG?

ESG is primarily composed of the following three blocks:

Environmental

Where the startup enterprise focuses on environmental issues including climate change, air or water pollution, sustainable energy sources, and human health. These issues can vary depending on the business domain of the startup.

By reducing their environmental footprint, startups can thus attract customer interest and eliminate penalties due to any violations.

Social

Where the startups focus on a range of social factors related to inclusiveness, diversity in the workforce, working conditions, and safety measures for protecting customer data. Examples of socially conscious businesses include CSR initiatives, local community relations, philanthropic activities, “clean” financial records, and employing persons with disabilities.

Furthermore, a positive social image can lead to better employee productivity, customer loyalty, and healthy public relations.

Governance

Where the startups focus on better governance including their business policies, transparency, investor relations, and accounting. Companies with good governance indicate a healthy corporate culture, thus attracting more investors and job applicants.

Apart from low employee turnover and high compensation, governance focuses on the accountability of higher management (or board of directors).

So, how do startup enterprises benefit from adopting ESG-friendly policies? Let us discuss their benefits.

Four Reasons why Startups Must Embrace ESG

No matter which industry domain, ESG-conscious companies stand to benefit from these policies. Here are 4 reasons why every startup must embrace ESG:

More Investments

Investors are now getting more and more inclined toward funding startups that provide environmental and social benefits. As a startup business, you stand to gain more funding and investments by embedding ESG policies into your company culture and business model right from inception. Modern investors look at non-ESG compliant companies as unsafe investment destinations as they are at higher risk of facing compliance-related litigations, bad PR, or social backlashes.

Talent Attractions and Retention

A recent study found that over 40% of millennials would prefer to work for companies that are committed to environmental sustainability and social values. With millennials comprising 50% of the global workforce in 2020, startups need to cater to their core values and embrace an ESG culture right at the core of their operations. Additionally, ESG-centric policies can also help in retaining the existing workforce as more of them are likely to stay with employers with whom they share a common vision.

Better Brand Reputation

2021 Consumer Intelligence Series survey conducted by PwC found that 83% of consumers believe companies should follow the best practices in ESG, while 76% of the surveyed consumers plan to discontinue their association with companies that poorly treat the environment, employees, or the local community. Startups with ESG policies can easily build a good brand reputation. Early-stage startups can increase their brand awareness and their brand appeal to potential consumers with ESG policies.

Lower Risks

Given their smaller business size, startups are more vulnerable to market risks and negative brand perceptions when compared to larger and established companies. Negative PR can permanently damage newer companies that lack a strong “brand heritage” or values to fall back on. ESG-compliant startups can go a long way in reducing market risks and scandals through better governance and practices.

Conclusion

To be competitive and successful in today’s market conditions, startups need to adopt ESG-friendly policies early on from their inception. In today’s world, there is no point denying that there are tremendous business benefits of adopting ESG policies – and they can shape the future of our business world and environment.