ESG: startup and investor collaboration is critical

Sophie Lonergan, Lead for Investor and Startup Engagement

ESG is a hot topic amongst businesses, and for good reason. For early stage startups, however, it’s a newer phenomenon. 

ESG stands for Environmental, Social, Governance, and generally relates to the value and impact a business creates around these three pillars. Some examples are the impacts a company makes on the environment, the diversity within its workforce and developing corporate policies for ethical and responsible governance. As founders, employees, investors, shareholders, corporates, and individuals begin to tune into the benefits of creating businesses that drive value beyond financial returns, increasing focus has turned to how startups can measure and report on ESG now, to enable a greater impact at lower cost later down the line. 

Designed to provide an entry to ESG scoring, the framework can be easily implemented from Seed to Growth stage, resulting in a tangible ESG score and a list of key areas to address to improve ESG performance. The framework asks questions based on environmental factors, diversity of the workforce, staff wellbeing and corporate policy to provide guidance to companies, and a common benchmarking of early stage companies credentials.

Sustainable innovation requires value to be created for the environment, society and the economy. With this in mind, it’s important to ask the right questions early to ensure that these three stakeholders are considered as early stage technology companies grow and expand.

Why are startups and investors starting to collaborate on measuring ESG?

 

• Better investment insights – understanding the level of ESG impact across the startups in investor portfolios provides investors with a better understanding of where the portfolio is creating impact beyond financial value. Over time, this may help investors to benchmark their portfolio against others in the market, improve their investment decisions and attract startups and limited partners (LPs.)

• Reap the benefits of a head start – prioritising ESG early in the business evolution enables founders to think strategically about where they would like the company to be in many years from now. It may seem too early to be considering it now, but thinking about it now enables founders to set out what sort of business they want to be in the future. For example – there may not yet be a person in the team becoming a parent, but by thinking about paternity and maternity leave policies now, it reduces the risk of putting a policy in place in a rush later.

• Effective and targeted support – having visibility of the ESG information of an early stage business helps both sides of the tables. Investors can see where companies need to do more, and therefore direct more support and resources to those areas, and startups themselves can use these gaps as a basis for asking for more support from investors. It creates accountability on both sides. 

 

• Get your own house in order – the companies we are working with on the FutureScope and MI Garage programmes are focussed on creating products and solutions that assist the world in transitioning to net zero. We’re really proud to have so many great companies using advanced tech to innovate to net zero. However, as we were reminded in the session, internal operations of a business and a company’s own impact need to be considered from the outset, not just the impact your product/solution has on clients. 

• Walking the walk – with increasing pressure on larger industry players to get a handle on their ESG creds, it will be more important than ever for startups working with industry, or taking on incumbents to get to grips with their ESG creds. Customer demand for businesses to ‘walk the walk’ and embed their own ESG policies, may become increasingly important for driving sales and adoption for early stage tech companies.  

 

Asking the right questions regarding ESG as early as possible is important to ensure that startups grow with the right considerations towards ESG, and ensure they create value for people, planet & profit.

 

If you are a startup and interested in accessing support thinking through ESG, register your interest for one of our upcoming FutureScope cohorts where you can also access support embedding the ESG_VC framework. 

For investors interested in understanding more about startups and scale ups that we are working with on creating sustainable business models, reach out to Sophie Lonergan for more information: [email protected]  

Interested in learning more about how Digital Catapult is thinking about sustainability? Reach out to David Pugh, Head of Sustainability for more information:  [email protected]