While start-ups are primarily viewed as the industry giants of the future, they often get left out of conversations about environmental, social, and governance (ESG) metrics. While there is a top-down view of the markets and historical data pertaining to many start-ups, there is not a bottom-up global view across regions and funds that includes the perspectives of start-ups as it relates to ESG.
So, what does ESG even mean to start-ups? Does it make sense for them to follow the rigorous ESG market metrics while still in constant survival mode? Is it ok for start-ups to ignore ESG until they have enough resources to implement real change? Do various stakeholders have a responsibility to support start-ups on their ESG journey? The results of a new survey from the World Economic Forum, ESG Pulse Check: Getting the Basics Right for Startups and Venture Capital Firms, revealed three key insights on the topic.
ESG is not a stand-alone topic for start-ups
According to start-ups who responded to the World Economic Forum's survey, ESG should not be approached as a stand-alone topic. Instead, each part of the metric — environment, social, and governance — should be embedded in corporate strategies and decision-making from the start so that these principles scale alongside the company. That is the implementation strategy that was used by 68% of respondents, with most having ESG metrics in place before they even had a viable product, complete C-suite, or office space.
This is also true from the compliance perspective. According to LRN's 2023 Ethics & Compliance Program Effectiveness Report, 42% of E&C professionals are adding or strengthening the topic of ESG to training. And nearly one-third of high-impact E&C programs address ESG obligations and goals in their codes of conduct.
ESG metrics must be friendly to start-ups
There continues to be a lack of methodologies covering how start-ups should practically approach ESG. Current standards in the market, such as SASB or GRI, remain focused on corporations that have the resources to dedicate to tracking all required metrics, while most start-ups are still focused on getting off the ground and into the market. However, 71% of start-ups agree that current standard ESG frameworks are useful as they provide the company's founders with an understanding of the need to:
- Use technology to track carbon-related metrics
- Offset carbon use incurred from travel by using more environmentally-friendly travel options when possible
- Manage and reduce resource use in office space, such as reducing food waste, packaging, and paper use
- Conduct annual pay equality and wage reviews
- Offer training on ethical business practices for employees
That said, many of the start-ups surveyed also expressed that ESG metrics should not be difficult for them to follow, measure and implement, but should be practical in nature. Being able to show the results of ESG metrics is an important asset for a start-up's ability to show all stakeholders — including investors, employees, and customers — that these principles are important and that the company is taking practical steps to incorporate them into its culture.
Customers and employees are the key stakeholders demanding ESG advancement
The majority of start-ups in the survey expressed the increasing importance of two key stakeholder groups when implementing their ESG strategies: customers (32%) and employees (27%). Past research reveals these groups have long been ESG's largest proponents. The ESG Pulse Check explains that employees are an important part of the equation, as Millennials and Gen Z now make up the largest share of the workforce and are, as a collective, committed to investing resources in a way that positively impacts society. A 2019 IPSOS survey showed that 69% of consumers have made changes to their buying behavior out of concern about climate change.
Interestingly, regulators were the lowest driving factor for start-ups (7%) at the time of the survey. However, it is important to note that the survey was deployed before numerous regulatory efforts were announced in 2023. Research organization EY reports that activities and proposals from the European Union are expected to have a heavy impact on US companies with EU operations, as European subsidiaries are going to be required to include certain ESG disclosures if they meet established criteria regarding the amount of revenue they make and the number of employees they have.
Tech consulting firm Capco notes that companies should begin preparing now for regulatory changes, rather than waiting for the final versions of these new regulations to be published. Some proactive steps they can take include evaluating the current ESG strategies they have and how they report or disclose this information to employees, customers, and investors. In fact, 98% of 300 corporate executives who participated in a recent Deloitte survey stated that they will begin compliance efforts with the regulations even if the final rule is changed or delayed, such as identifying climate risks associated with their business and incorporating them into their risk management processes; collecting data relevant to the climate and identifying climate-related metrics to track and report, along with the company's climate targets and goals.
The purpose of these new regulations is to prevent "greenwashing." According to Business News Daily, greenwashing refers to a company claiming to be environmentally conscious in order to attract customers and employees, when they actually aren't making any intentional efforts to implement sustainable business practices. It is important to note that not all cases of greenwashing occur due to bad intentions. Many start-ups have the desire to be environmentally conscious in their practices but are unable to dedicate the resources needed to implement ESG practices.
The key takeaway
Start-ups have been largely left out of the ESG conversation until now. As these businesses have an increasing societal role, it is crucial that they are given consideration in discussions about ESG and what it means to their stakeholders. To learn more about how to integrate ESG into your organization, download a copy of LRN's 2023 Ethics & Compliance Program Effectiveness Report.