The Rise of ESG in Start-ups

ESG (Environmental, Social, and Governance) considerations have gained significant attention in the start-up ecosystem, with investors and entrepreneurs increasingly recognising the importance of sustainability and social impact. The SuperVenture conference held in Berlin this year shed light on the growing emphasis on ESG, reflecting a shift towards responsible investing. London-based firm Balderton Capital, at the forefront of this movement, has released a guide to assist start-ups in navigating ESG best practices. In this article, we explore the insights shared by Elodie Broad, Balderton’s head of impact and sustainable future goals, on the significance of ESG and where start-ups should focus their efforts.

Broad explains that global challenges and societal expectations have placed unprecedented pressure on corporations to take responsibility for their impact, particularly in the financial system. Institutional investors initially felt this pressure, which has now trickled down to public markets, private equity, and venture capital. Furthermore, the rising demand from employees and consumers for sustainability and social commitment has catalysed the prominence of the ESG agenda in the start-up ecosystem. Broad draws a parallel between the digital transformation and the sustainability transformation, emphasising that integrating ESG into business models is becoming integral to building a successful start-up.

Broad identifies two significant factors that have delayed the embrace of ESG in the venture capital and start-up communities. Firstly, due to the nature of ownership structure, VCs are minority shareholders and lack direct control over portfolio companies. While VCs can incentivise companies to adopt ESG practices, they cannot enforce them. Secondly, the growth journey and stage of start-ups differ from those of private equity (PE) firms. Start-ups face numerous competing priorities in their early stages, often struggling with limited resources and overwhelmed by various challenges. Thus, the implementation of ESG initiatives may take longer for start-ups, as their immediate survival takes precedence.

Aside from fulfilling environmental and social responsibilities, start-ups stand to gain several benefits from embracing ESG practices. Broad highlights the positive impact on talent acquisition as the new generation seeks purpose-driven companies. By incorporating ESG values into their culture, start-ups can attract and retain top talent. Additionally, B2B companies can leverage ESG initiatives as a differentiating factor in procurement decisions made by larger corporations. ESG considerations are increasingly becoming part of the criteria for partnerships and collaborations. Furthermore, as consumers become more conscious of sustainability, start-ups with strong ESG commitments gain a competitive edge. Future investors are also scrutinising ESG performance and data, making it a crucial factor in securing investment.

Broad emphasises that there is no right or wrong time to begin integrating ESG practices, but earlier implementation tends to be more straightforward in terms of complexity, implementation costs, and adaptation. Start-ups should prioritise diversity and governance as initial focus areas. Diversity should be considered from the outset while building teams, and governance should be established as the bedrock for ESG initiatives. Start-ups need to align their sustainability efforts with their growth journey, prioritising areas that make the most sense for their business model. While climate and diversity are essential for all companies, specific ESG priorities may vary depending on the start-up’s industry and context.

Start-ups often face resource constraints and numerous competing priorities, particularly in their early stages. ESG initiatives can appear overwhelming when founders or CEOs are already juggling multiple responsibilities. Despite their desire to implement ESG policies, start-ups may struggle to move as swiftly as desired due to these resource limitations. However, it is crucial for start-ups to recognise the long-term benefits and strive to incorporate ESG practices in a way that aligns with their available resources and growth trajectory.

While start-ups may not directly face regulatory requirements at present, they are indirectly impacted through investor expectations and stakeholder demands. Broad highlights that ESG regulations are evolving and becoming more stringent over time, with thresholds for compliance potentially affecting start-ups in terms of employee count, revenue size, and other factors. Start-ups aiming for hyper-growth are likely to intersect with regulatory requirements sooner or later. Although regulation remains fluid and subjective, it is essential for investors to support and guide portfolio companies on their ESG journey, preparing them for potential regulatory frameworks.

ESG considerations have emerged as a vital aspect of start-ups’ success, with investors increasingly seeking companies that demonstrate strong sustainability and social impact strategies. Start-ups that proactively integrate ESG practices position themselves for various benefits, including talent attraction, business partnerships, consumer preference, and future investment opportunities. While start-ups face challenges in implementing ESG initiatives, such as resource constraints and competing priorities, they can navigate these hurdles by prioritising diversity, governance, and proportionate sustainability efforts. As ESG regulations continue to evolve, start-ups should remain vigilant and prepare for potential compliance requirements. Ultimately, integrating ESG into the fabric of start-ups can pave the way for a more sustainable, purpose-driven future.

(Source: Pitchbook)

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