ESG for start-ups

Written by: Marco de Novellis Posted: 03/05/2022

BL77 startups illoWhile 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 FACTORS

While there’s no definitive list of ESG criteria, start-ups can track and measure various ESG factors considered by investors:

Environmental    
• Air and water pollution • Biodiversity • Carbon emissions • Deforestation • Energy efficiency • Waste management • Water usage    

Social
• Customer satisfaction • Data protection and privacy • Gender and diversity • Employee engagement • Community relations • Human rights • Labour standards    

Governance
• Board composition • Audit committee structure • Bribery and corruption • Executive compensation • Lobbying • Political contributions • Whistleblower schemes

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.”

BL77 startups illo boxPutting the ‘social’ into start-up

LNJ is a new Channel Islands-based business offering a social value service to companies that don’t have the time or resources to manage it themselves. It helps organisations to integrate the S of ESG by connecting them with charities and creating and managing social value initiatives that have a measurable impact. Chief Executive Jensen Nixon and Chief Operating Officer Laura Burton explain more.

• How did the idea for the business come about?
With a rising consensus that the social role for organisations goes beyond CSR, we saw a gap in the market to provide a service for organisations that were struggling to get effective ESG programmes in place.
We thought we could work with businesses and individuals to deliver this service, taking them from inception to completion and reporting all the way through.

• How does it work in practice?
We’ve partnered with local charities and created initiative programmes that organisations and individuals can invest in, providing periodic updates to demonstrate the wider added value of what they’re doing.
Through our Social Return on Investment (SROI) model, we use a principle-based approach to show the wider definition of value.

For example, if someone donates money to a luncheon club scheme, we can measure the SROI to demonstrate that this donation is making a real difference to the community. 

This measurement is made up of several factors. One example could be offering mild therapeutic exercise at the luncheon club to the elderly, to help stop them having accidents at home, which would mean fewer hospital admissions and alleviate the cost of staying overnight in hospital.

Another example might be that regular meals would improve the person’s health and result in fewer visits to the doctor.

• What is your advice for start-ups looking to integrate ESG?
Start-ups should seek to demonstrate commitments to ESG from a very early stage. First, consider your products and services and if they will have a negative environmental or social impact. Then identify how you will offset the impact.

A key component of ESG is being able to evidence and measure the impact. Start-ups should have the appropriate reporting in place, so that impact can be easily referenced.

 


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