How to Guide - Implementing ESG
ESG refers to the consideration of environmental, social and governance criteria. ESG is becoming more and more important. Companies and investors, as such as governments and regulators, attach the highest importance to sustainable business practices. Companies are no longer successful with "greenwashing", i.e. mere lip service or only alleged sustainability. The reason: society's perception of environmental and social issues has increased massively in recent years.
But what does this mean for companies? How can they meet the requirements in the area of ESG? Many capital market-oriented companies already integrate sustainability reports into their annual financial statements. For startups aiming for an IPO in the short or long term, it is therefore worthwhile to think about ESG from the very beginning and to take it into account in the corporate strategy. Because even if early stage investors aren't already asking questions about supply chain, carbon footprint and diversity, pension funds and private investors definitely will.
We show you how to integrate ESG into your corporate DNA and thus convince ESG-conscious venture capital investors about you and your startup.
Analyse and be prepared for possible changes
In the "early-stage" phase, in which you focus on adapting the product to the market, you will probably go through several changes for both your product and the business model. Although speed is important in this process, you should go a step further into the "product-market-fit" and consider the second- and third-phase impact of your product and make any changes in your strategy. For a venture capital investor, in addition to the business idea as such, it is particularly important whether new markets can be opened up with your product or concept, considering to the ESG criteria.
Identify risks correctly
Even if your company does not appear to be very risky in terms of sustainability at the beginning, an undetected ESG deficit can develop to a significant problem. It is therefore essential to identify and anticipate key risks and stumbling blocks - for instance to meet the requirements of the German Supply Chain Act, which will come into effect in 2023. Although, it will firstly only apply to companies with more than 3,000 employees, you should consider it in your business plan right from the start. Always think big!
Investigating the ESG risks impacting the sector in which your startup operates is a good first step. Another important step that can pay off in the long run is to seek VC investors that can help you grow your business while building your ESG capacity.
Set priorities
As a founder, your goal must be to establish a solid foundation for building robust ESG management processes. Just as you prioritise certain potential features and solutions in product development, you need to prioritise issues with high relevance and low complexity in ESG.
No VC investor will penalise your company for not having a fully developed ESG strategy. However, the market, i.e. your customers, might reprimand you as the startup matures - because big sales usually go hand in hand with big publicity. For example, generation Z and millennial consumers often boycott a company if it is not environmentally conscious.
Focus on individual key figures that are measured in the respective business phases
It depends on the particular business phase what and how you measure. It could be the customer retention rate if you are trying to find the fit between product and market, or the number of new customers if you are growing up your business.
Similarly, it is important to identify one to three ESG metrics that are appropriate for the stage of business your company is involved. Startups in the technology sector, for example, might focus on privacy and diversity metrics first to cover governance and social criteria. Always make sure that the metrics you choose could also be relevant for the next investors.
Communicate with your stakeholders
Involve your investors and customers in your company's sustainability process and be transparent that ESG management is still evolving as you grow. Develop sustainable measures such as sustainable projects with direct reference to your business model and your location. For example, make apps like Earnest available to your employees. In this way, your employees can track their carbon footprint and learn how to make their daily life more sustainable. Do good and talk about it!
