3 reasons why startups need to pay attention to ESG principles?
Companies around the globe are increasingly adopting Environmental, Social, and Governance (ESG) principles. These standards provide guidance for more effective business operations, and for creating positive change in the world.
However, while various mature and listed companies have worked to internalize the ESG principles within their organizations, the same priorities haven’t quite reached the radar of many early-stage startups.
Tied down by budget constraints, limited resources, and only a handful of employees, many startups see ESG principles as unaffordable luxuries that are better left for the “big guns” (i.e. listed companies). Such a view understandably leads many startups to set aside ESG principles, perhaps saving them for consideration at some future date.
This is a mistake. As we will see, ESG initiatives benefit not only the community and environment, but also the very same businesses that implement them. Moreover, ESG principles are quickly becoming a global standard for companies of all sizes to emulate, particularly after recent culturally significant events such as the pandemic, #MeToo, and the Black Lives Matter movement.
If the goal of startups is to help shape the future, they must be ready to lead by example. Such leadership brings real-world rewards in three separate ways.
- Attracting more investment
Investment is a key ingredient for startup success, as it builds partnerships that ought to go beyond mere financial transactions. As the ESG trend grows, companies and investors increasingly prefer partnerships that have sustainability as a core value, as this shared ideal tends to produce positive and lasting relationships that are well suited to both sides.
From an investor’s standpoint, companies that have implemented ESG policies offer real advantages in terms of risk mitigation. Sustainable practices, progressive social initiatives, and transparent corporate governance tend to make businesses less vulnerable to potential regulatory violations, lawsuits, and fines. They also signal a well-run company which has stable finances and management – an especially promising sign in the fragile world of startups.
Just as importantly, investors tend to work with companies whose values they share. When startups incorporate ESG standards into their internal policies, they indicate a commitment to widely held values and ideals.
These partnerships also reflect well on investors themselves, thereby helping to establish a win-win framework moving forward. According to research from US-based seed accelerator 500 Startups: “A majority (90%) of all founders surveyed stated that if an investor required a company to implement ESG, it would make the investor desirable.”
As entrepreneurs know well, support from investors is especially important during the early stages of a company’s development – provided the startup and its investors are closely aligned in their values and priorities. ESG-themed policies can put that support within reach, giving a big advantage to startups that choose to embrace them.
- Earning more revenue
Startups with innovative, sustainability-conscious goals will find it easier to attract consumers as well. According to a report by Accenture:
Consumers are no longer making decisions based solely on product selection or price; they’re assessing what a brand says, what it does and what it stands for. They support companies whose brand purpose aligns with their beliefs. And they reject those that don’t.
A startup with admirable ESG policies is therefore more likely to attract committed and loyal customers. If inspired, this same customer base can also help to promote the brand through traditional word-of-mouth and social media channels.
By trending online for all the right reasons, startups can increase both sales and engagement – an encouraging sign for their long-term business prospects.
- Reducing employee turnover
Startups following ESG principles will have an easier time retaining their talent – the engine that drives the business forward.
Turnover rate for startups is typically twice the industry average, though a solid ESG foundation may mitigate this issue. People of all backgrounds prefer to work for companies that are well-run, and stand for social and environmental good.
Millennials in particular tend to focus on these types of priorities. A study on employee sentiment found that 40% of millennials “have chosen a job because the company performed better on sustainability”, whereas only 17% of Boomers said the same. 70% of millennial respondents also said they “would stay with a company if it had a strong sustainability plan.”
As early-stage companies typically do not have the resources to provide lucrative salaries or other “company perks” that larger corporations use to recruit and retain their talent, startups must use other tactics. Strong and authentic ESG values can make a real impact in this area, helping to build effective teams that stay together and work with passion.
Creating a brighter future with ESG principles
Success in today’s startup ecosystem requires enormous effort, and even the smallest advantage can make a big difference. By providing a significant reputational boost in the minds of investors, customers, and employees alike, ESG policies can open the door to real growth moving forward.
Rather than viewing ESG initiatives as an unnecessary expense, entrepreneurs should view them as an innovative, sustainable investment. In fact, the very nature of startups makes them well suited for the ESG model, as young businesses can make the necessary refinements quickly and easily. Listed companies actually have more work to do in this regard, as they are typically weighed down by rigid internal systems that are already in place.
While ESG principles are by no means a guaranteed recipe for startup success, the advantages they bring are considerable. From this perspective, the global shift toward ESG becomes far easier to understand. By joining this positive business trend, startups can better support their own interests, while also leading the way toward a brighter future.