Integrating ESG from the Ground Up in a Startup

The UN General Assembly recently adopted a landmark resolution on the promotion of "safe, secure and trustworthy" artificial intelligence (AI) systems that will also benefit sustainable development for all. The resolution, backed by more than 120 Member States, highlighted the “respect, protection and promotion of human rights” in the design, development, deployment and use of AI.

This resolution underscores the growing importance of Environmental, Social, and Governance (ESG) practices in the tech industry, particularly for startups. Many startups around the world will want to play their part in creating a more responsible business, not just in AI but across all aspects of their operations. However, it can seem like an unattainable goal, with many regarding it as something to worry about when the business has reached a certain size. This approach risks putting these companies at a significant disadvantage in an increasingly ESG-focused business landscape. Investors, customers, and employees are all placing greater emphasis on sustainability and social responsibility, and startups that fail to prioritise these issues may struggle to attract capital, talent, and market share.

By taking a comprehensive and proactive approach to ESG, software startups can not only mitigate risks but also create significant opportunities for growth and value creation. They can attract top talent, build stronger relationships with customers and communities, and differentiate themselves in an increasingly competitive market. Most importantly, they can contribute to a more sustainable and resilient future for all.

Laying the ESG foundation

The key to building a sustainable software startup lies first in establishing a strong ESG foundation from the outset. Startups that implement robust ESG practices early on can benefit from a range of value-enhancing aspects, including improved employee attraction and retention, higher revenue, better stakeholder management, and a greater likelihood of a successful exit. In fact, Boston Consulting Group research has shown that ESG-compliant startups often command higher exit multipliers and valuations compared to their non-compliant counterparts.

The beliefs and values of founders and early employees play a crucial role in shaping a company's ESG foundation. These early choices and values become deeply ingrained in the company's culture, operations, and product decisions, setting the tone for its future growth and development. By consciously incorporating ESG principles into the startup’s DNA from the beginning, founders can lay the groundwork for a truly sustainable and responsible business.

Driving value through early ESG efforts

Startups that prioritise ESG factors from the start gain a significant competitive edge over those that delay implementation. By tracking important metrics along the growth journey, these startups can easily provide the necessary data for subsequent exits, avoiding the need to retroactively collect information. This proactive approach to ESG not only streamlines the exit process but also demonstrates a genuine commitment to sustainability, which is increasingly valued by investors and stakeholders.

One of the most critical areas where early ESG efforts can drive value is in employee well-being and engagement. By focusing on initiatives such as clear contracts, employee Net Promoter Score (e-NPS) surveys, and robust health and safety policies, startups can boost productivity, reduce turnover, and create a more positive work environment. Studies have shown that companies with engaged employees can experience profits up to 23% higher than those with unhappy employees.

Diversity and inclusion are also key components of a successful ESG strategy. Startups that prioritise diversity in recruitment not only attract a wider range of talent but also benefit from improved financial performance. McKinsey research has found a direct correlation between diverse workforces and higher profits, highlighting the business case for embracing ESG principles. By crafting inclusive job descriptions and involving diverse perspectives in the recruitment process, startups can lay the foundation for a more innovative and successful future.

Tailoring ESG implementation to the company stage

While the benefits of early ESG adoption are clear, startups often struggle with knowing where to begin. The key is to tailor ESG implementation to the most value-enhancing activities for the company's current growth stage. Rather than trying to implement everything at once, startups should focus on the areas that will have the greatest impact given their size and resources.

In the early stages, ESG efforts should prioritise employees, product development, and compliance with local laws. As the company grows and surpasses ten employees, it can begin to level up its ESG ambition, increasing visibility and importance among employees. This stage should focus on developing employees, expanding feedback channels, and establishing effective corporate governance and board structures.

For startups with physical product offerings, particularly in the B2C space, measuring environmental footprint should be a priority from the outset. Understanding the environmental impact of the product not only helps startups select suppliers but can also contribute to higher margins and revenue. As Capgemini notes, sustainability should be viewed as a value centre rather than a cost centre, with business leaders recognising the connection between sustainability and growth.

Building ESG practices for long-term success

As startups grow and evolve, so too must their ESG practices. While ESG responsibilities may initially fall to founders or other committed employees, it becomes increasingly important to assign a dedicated person to coordinate ESG implementation as the company expands. This individual should have a deep understanding of ESG principles and be responsible for ensuring proper compliance, reporting, and continuous improvement.

Providing comprehensive ESG training and information to all employees is another critical component of building long-term success. By educating the workforce on ESG principles and empowering them to contribute to sustainability efforts, startups can align their values with their actions and create a culture of shared responsibility.

Regular discussions with investors and benchmarking against best practices can also help strengthen ESG integration and prepare startups for future growth. Investors often possess a wealth of knowledge and can provide valuable insights into industry trends and areas for improvement. More than that, it is an aspiration of many VC funds to invest in the future. By engaging in these conversations and learning from the experiences of others, startups can refine their ESG strategies and position themselves for success.

ESG every step of the journey

Ultimately, ESG should not be viewed as a one-time exercise or a box to be checked off an annual reporting form. Instead, it should be recognised as a continuous process that evolves alongside the startup’s growth and challenges. Each step of the journey requires a different approach, and regularly updating ESG practices ensures they remain relevant and value-enhancing.

By embracing ESG as a continuous process, startups can avoid the risk of it becoming a burden rather than a benefit. When ESG is fully integrated into the company's operations and decision-making processes, it becomes a powerful tool for driving long-term success and creating value for founders, investors, employees, and customers but also contributes to a more sustainable and equitable future for all.