Why ESG is important

The moral imperative Copy link

From climate change and biodiversity loss, to economic uncertainty, human rights violations, social unrest and growing inequalities, we cannot ignore the significant global crises we’re collectively facing. We have a responsibility towards future generations not to leave the world a worse place than we found it, and contribute towards building a better, brighter future for all.

Founders: If you are thinking big, and building something that you believe will last, then you have a moral imperative to ensure that it ultimately makes the world a better place.

“We started from almost nothing. But today, Contentsquare has reached a point where we’ve built up power through our product, people, partner network, resources and sheer scale. And — as you’ve heard — with power comes great responsibility. Our growth must have meaning. We can’t become one of the greatest software companies in the world if our company isn’t good for the world.” Jonathan Cherki, Founder and CEO at Contentsquare.

The business case Copy link

Moral imperative or not, sustainability is too often perceived as a costly distraction. Yet societal, regulatory and market trends are rapidly accelerating and converging, putting sustainability as a driver of enterprise value and competitive advantage. Engaging with sustainability strategically can reap many benefits, including:

Winning the talent war: Your people are your greatest asset and the competition for top start-up talent is rife. In the war for talent, a commitment to diversity and sustainability is a great differentiator. This underlying commitment will significantly bear on company culture and position you as an attractive, thoughtful and committed employer.

Immediate cost savings: While doing the right thing by people and the environment may sometimes come at a price, there are also some ways in which more sustainable practices help businesses save costs. A few examples include energy efficiency initiatives to reduce energy usage, buying of second-hand items, reduced use of raw materials in production and packaging, and reduced shipping costs through use of local suppliers.

Access to funding: VC investors are increasingly taking company sustainability into consideration when making decisions about where to allocate their capital. This is partly driven by their belief that businesses built on strong environmental, social and governance foundations will outperform those who aren’t, and partly driven by their own investors' ESG-related demands. With reports of 59% of 600 early-stage European VC investors having declined an investment opportunity in the past twelve months due to sustainability concerns, start-ups can expect to undergo increasingly detailed due diligence on how they are building their business on environmentally and socially responsible principles, and how they are putting systems and processes in place to do so. Strong sustainability initiatives may also unlock other avenues for funding – such as grants or sustainability-linked loans – as policy and debt instruments are rolled out to further incentivise the transition.

Competitiveness and differentiation:
- B2C: Consumers care about sustainability and are increasingly putting their money where their mouth is. A recent study found that products making ESG-related claims averaged 28 percent cumulative growth over the 2017-2022 five-year period, versus 20 percent for products that made no such claims.
- B2B: Organisations are increasingly assessing vendor climate, human rights and other sustainability commitments in their procurement processes and putting clauses in place to leverage their supply chain to drive their ESG goals. This trend is set to strengthen as new regulations such as the Norwegian Transparency Act, the German Supply Chain Due Diligence Act, and the EU’s proposed Corporate Sustainability Due Diligence Directive are rolled out to hold larger enterprises accountable for ensuring that human rights and environmental considerations are observed across their operations and supply chains.

Minimise risk and build resilience: Considering environmental, social and governance factors proactively, and establishing the controls and processes to manage them appropriately, will help you pre-empt any reputational damage linked to your business conduct and culture - which could also lead to expensive fines, revenue loss and more. In some cases, it can also help you anticipate and course correct operational risks.

Because for fast-growing companies, it will soon enough no longer be a choice but a requirement:
- The EU’s Corporate Sustainability Reporting Directive (CSRD), which aims to bring sustainability reporting in line with financial reporting and is expected to come into force in 2024, applies to both listed companies and private companies that meets two out of three of the following criteria: more than 250 employees, a turnover of over €40 million and over €20m total assets, impacting more than 50,000 companies or three quarters of business in the European Economic Area.
- Meanwhile, thresholds for existing requirements are expected to come down. For example, the EU Directive on Pay Transparency coming into force in 2023 requires employers with 250+ workers to report their gender pay gaps every year, and employers with 150-249 workers every three years. This threshold will be lowered to 100 workers by 2028. Similarly, it is anticipated that carbon accounting will become expected of businesses of all sizes in the years to come.

“Get these key elements right early on and you’ll spark a virtuous cycle, with a diverse team building a culture that draws even more diverse and talented employees to your start-up. That’s the best way to build a successful business, raise capital, and sustain investors’ interest as you eventually move toward an IPO. So plan for the future — and begin building a more diverse company today.” Charles Miglietti, Co-Founder and CEO at Toucan.

"To operate as a responsible business, it is crucial that we act in a sustainable way, allowing us to continue attracting the best talent, aligning with customer sentiment and new markets, and ensuring that we can transition to - and be part of - the low-carbon economy of the future." Catherine Birkett, CFO at GoCardless.

“The mission took the commitments we made at the beginning of this adventure and turned them into something unifying. It is clear that that was the right thing to do: half of all candidates that apply for a job at Brigad do so because of our mission.” Jean Lebrument, CPO at Brigad.

Further evidence: Copy link

Do ESG efforts create value? - Bain & Company and EcoVadis
Five ways that ESG creates value - McKinsey
Getting the Basics Right for Start-ups and Venture Capital Firms - WEF
Start-ups need an ESG strategy - HBR
Why and how to build your start-up business around ESG - Forbes

Why think about ESG early in your start-up journey? Copy link

“It’s hard to launch a company today and ignore the existence of systemic challenges. Moreover, there is a huge benefit in doing this right from the outset. Building these considerations into the very heart of a company’s mission helps to ensure that economic, social and environmental programmes can be fully deployed and at the right level. It is much harder (and often less effective) to change direction along the way or to correct downstream for issues caused by your activity.” Dounia Wone, Chief Impact Officer at Vestiaire Collective.

When your company scales, its business model-related sustainability issues and impact will scale with it. Integrating good practices early in your culture and operations sets the course. And while sustainability is never straightforward, it only gets more complex and onerous as your company grows in scale. For example, strong and responsible environmental and social practices are much easier to put in place when you have one office, one centre of operations, and your customers are based in one market. And these considerations will then be inherent when you open other offices, and enter other markets.

Therefore, while it’s never too late to embark on your start-up sustainability journey, there are a number of clear benefits to thinking about it early:

Make it part of (and let it shape) your company’s DNA: Build your ESG foundation early to make it a core part of company culture and growth. When your company is small and agile, you can create the right culture and mindset from the outset. A clear ESG vision and programme also contribute to strengthening culture by focusing on common values.

Secure future credibility: As businesses grow, an explicit ESG approach becomes less of a choice and more of an imperative as the company falls within the scope of standards and regulations and is subject to greater scrutiny. This leads many companies to rush into it as an afterthought. Being able to demonstrate that your company was thinking about its role and responsibility in promoting sustainability from the very beginning bears additional authenticity to your approach. Associating your brand with responsibility and sustainability from the get-go gives you more credibility.

Avoid switching and/or remediation costs: Retrofitting sustainability into a business, rather than integrating it from the start, will be both expensive and complex. For example, switching to suppliers with a lighter environmental footprint can be disruptive to operations and requires starting a new commercial relationship from scratch. Organisational behaviours can also be hard to change. Starting early avoids a massive switching cost because you’ll have already integrated best behaviours and practices into your operating system. It also means understanding your business model-linked issues and how to manage and mitigate them as you grow, avoiding potentially costly mistakes and remediation costs. Finally, as policy and legislation around corporate sustainability strengthens, having sustainable business practices already in place means you are more resilient to regulatory change and associated remediation costs.

“The later you start, the more expensive it will get. Start as early as possible: gather data, understand your impacts and risks, establish your goals and create initiatives to get you there.” Luis Orsini-Rosenberg, Co-Founder and CEO at CYCLE.

Major corporations have faced significant penalties and serious reputational damage as a result of not taking this seriously. Lawsuits against companies concerning ESG issues have grown by 25% over the last three decades.

In July 2020, fast fashion giant Boohoo was accused of modern slavery after it emerged that garment workers at factories in Leicester, UK, were being paid far below minimum wage and in unsafe conditions. Shares in Boohoo fell 43% the week the news came out, knocking £1.1bn off Boohoo’s value, with many retailers suspending their relationship with all Boohoo brands.

In July 2021, German carmakers Volkswagen and BMW were fined €875m by the EU after finding that they had colluded with another rival, the Mercedes-Benz owner Daimler, to delay emissions-cleaning technology. As of 1 June 2020, the scandal had cost VW €31.3 billion in fines, penalties, financial settlements and buyback costs.

In July 2022, mobile communications giant T-Mobile announced it would pay an aggregate of $350 million and spend an additional $150 million to strengthen its data security to settle a consolidated class action lawsuit following a data breach that occurred in early 2021, impacting an estimated 77 million people.

It is tempting to put sustainability on hold when you are still hustling to find product-market fit, sign your first customers, build your team and attract investors. However, companies that take action early on will have the most authentic and robust ESG strategies as they scale.

While we want to encourage all companies to think about sustainability from the get-go, we recognise that in the early days of business-building - and in challenging times in particular - it can seem impossible to find the time and resources. Remember that every company’s journey will be unique, and don’t be too hard on yourself if you can’t achieve everything you’d like to just yet. The lean start-up “build-measure-learn” rule is particularly relevant for ESG where it’s about starting the process, starting small, and improving over time. Ultimately, It’s never too late to get started on your journey, but the sooner you start, the better.

“When it comes to your impact, you can’t borrow from the future — it isn’t something that you can just ‘work out later’ once the company is public. For this reason, I believe that freshly founded companies have the best chance of establishing impactful frameworks in their companies. The bigger your company gets, the harder it becomes to proactively embed impact into your operations. Once you’ve broken trust, you can’t just piece it back together. Adding defensive CSR (Corporate Social Responsibility) measures further down the road will inevitably get written off as insincere.” Kat Borlogan, Chief Impact Officer at Contentsquare.