ESG for start-ups

While ESG credentials are now a part of everyday boardroom discussions in big business, the growing awareness of environmental, social and governance issues among investors and consumers means start-ups must also demonstrate their ESG compliance

“Almost every investor is looking at ESG,” says Garry Mansell, a veteran angel investor and entrepreneur who builds and sells start-up businesses.

Investment in ESG-dedicated funds already exceeds $2.7tn globally. And, by 2025, ESG assets are expected to reach $53tn – a third of total assets under management.

Investment firms, Mansell explains, are now assessing start-ups based on their environmental, social and governance (ESG) criteria – alongside their business plans and growth potential – to determine whether to make an investment.

Start-ups may lack the resources of established firms, but as investors look to match profit with purpose, it’s never been more important for start-ups to showcase their ESG credentials.

Why ESG?

ESG is clearly growing in importance, but that interest isn’t limited to investors. One in three UK consumers have stopped buying products due to ethical or environmental concerns, according to a recent Deloitte survey.

Meanwhile, in a recent survey of 2,000 UK-based workers, 65% said they were more likely to work for a company with a strong environmental policy.

For Mansell, author of Simplify To Succeed, a guide to scaling and selling a business, start-ups that integrate ESG into their business models gain a competitive advantage.

“It’s not just about making money any more; people want to work for companies with purpose. And if you’re seen to be more socially and environmentally aware, consumers will also take note and buy from you.”

Norma O’Sullivan, MD of TMGA Wealth Management, a Jersey-based business launched last year, believes that start-ups can better attract and retain talent and build brand reputation by adopting ESG principles.

“Those principles lay the foundations for building a healthy internal culture, positive external image and promoting good and fair practices for all stakeholders – employees, clients, regulators, suppliers and the wider community,” she says.

“If you have healthy relationships with your stakeholders, it allows for a strong, resilient business.”

ESG in practice

O’Sullivan and her colleagues prioritised the G of ESG when building TMGA. A governance director was among the company’s first recruits, responsible for implementing an ESG-friendly operating framework and ensuring the firm’s values, culture and strategy align.

“Environmental and social factors get more attention, but we see the G as key to having an authentic ESG strategy,” she says. Only with strong governance, O’Sullivan argues, can you successfully embed the E and S criteria into a business.

But choosing what to focus on remains a challenge for start-ups, particularly due to the lack of a global standardised framework for ESG.

There is no ESG checklist that start-ups can tick off. Instead, they refer to ESG frameworks such as the UN Sustainable Development Goals or the Global Reporting Initiative, addressing ESG factors ranging from energy efficiency to diversity.

“ESG is the area of nothing defined,” says Ian Horswell, Global Head of Business Development, Funds, at Suntera Global, which obtained its fund administration licence in Jersey last year.

There are more than 600 ESG ratings and rankings in use today, but ratings by prominent agencies are only aligned in about six out of 10 cases, according to research conducted at MIT Sloan School of Management.

EY has highlighted the lack of consistent and comparable data as the biggest ESG investing challenge for asset managers.

Investors may have a checklist of ESG factors they scrutinise, Horswell says, but every investment team prioritises different factors based on the companies in which they invest.

“If you’re looking at private equity in South American countries, they may be concerned with deforestation or employment conditions. If you’ve got a real estate project in London, there might be carbon offset targets.

“A construction company might ask: where are they getting their cement and sand from? Are they energy-efficient? Do they pay the living wage?”

Start-up managers don’t have to cover every facet of ESG, Horswell explains. Instead, they should understand what the core focus of the business is and where they can best integrate ESG.

Strategies for success

There are organisations that can help. Suntera Global, backed by ESG-centric private equity firm Palatine, provides governance services to start-up firms.

LNJ, a social value service launched in Jersey this year, takes care of the S in ESG, helping companies implement and measure the impact of social initiatives.

LNJ has its own methodology to assess social impact and specialists go out into the community to measure impact on the ground. 

For O’Sullivan, companies that successfully implement ESG do so from the outset. Here, start-ups have an advantage over established firms, she says. By embedding ESG practices, starting small but levelling up as they grow, start-ups can weave ESG into all aspects of the business.

Boosting your ESG credentials doesn’t have to be expensive either. Start-ups can get quick wins by selecting office space with strong ESG criteria. 

They can create environmental and social policies, ensure fair wages and diverse boards, and use glass instead of plastic, for example. 

Start-ups can offer their expertise to support local charities or tap into back-to-work schemes. They can also target investors with ESG credentials to bring them into the business. 

Applying for B Corp Certification is another good way for start-ups to prove their ESG credentials, as Mansell explains. 

“People like me know how hard it can be. I don’t think any investor expects a start-up to have flawless ESG credentials,” he says. “But if you have a path to getting where you need to be, and you can demonstrate it, then investors will come back to you.”

To achieve net zero by 2050, the UK government has set in law the world’s most ambitious climate change target – to cut greenhouse gas emissions by 78% by 2035 compared with the level in 1990.

Major central government procurements must now explicitly evaluate social value rather than just consider it, and new sustainability disclosure requirements will eventually require businesses to disclose their environmental impact.

Meanwhile, to combat greenwashing, the UK’s Competition & Markets Authority has published a Green Claims Code and is undertaking a full review of misleading ESG claims by businesses in 2022.

Most important, with responsible business practices now high on the agenda for governments, regulators, consumers and investors, start-ups must be as transparent and honest as they promote their ESG credentials.

As Horswell concludes: “It’s very easy to turn around and say ‘We’re ESG focused’. Well, now you’ve got to prove it.”