Why startups need an ESG strategy for a competitive edge

Environmental, Social and Governance (ESG) is a leadership approach of a business that goes beyond its financial performance. As the world becomes increasingly aware of the impact that businesses have on the environment and society, investors, industry leaders and governments are taking note of how businesses are incorporating ESG practices into their core structure.

Stakeholders in India’s startup ecosystem are also placing greater emphasis on ESG, which is evident from a significant increase in ESG funds in India. Growing fivefold within four years and reaching USD 1.5 billion (INR 12,447 crore) in March 2022, ESG funds have witnessed a phenomenal rise in India.

Understanding ESG and its significance

The environmental aspect accounts for a business’s impact on the environment, including carbon emissions, power and water consumption, material sourcing and waste management. The social aspect evaluates the treatment of employees, customers and stakeholders, covering diversity and inclusion, data protection, human rights, community engagement and sensitivity to social issues. The governance aspect evaluates compliance with internal standards in terms of policies, culture, inclusion, risk management, transparency and accurate reporting. Keeping up with ESG practices not only helps to avoid penalties and negative publicity but also minimises long-term business risks.

Here’s why startups must have a comprehensive ESG strategy embedded in their core to outperform competitors.

  • Improving operational efficiency: Startups with an ESG framework built into their system can cut costs through lower energy consumption, reduced wastage and an overall reduction in operational costs.
  • Attracting investors: Investors are increasingly focusing on startups that share their values. They view ESG-compliant startups as being more mature and capable of outperforming competition. According to an investor survey by PwC, nearly 82 per cent of investors stated that companies must embed ESG in their corporate strategy.
  • Appealing to ESG-conscious consumers: With consumers becoming more likely to choose a business that cares about the environment, social issues and ethics, ESG compliance has become essential to attract this growing customer base.
  • Lowering the cost of capital: ESG compliance reduces regulatory and reputational risks and leads to a lower borrowing cost and a lower cost of equity. Also, better operational efficiency and sustainability help with cost savings and financial performance. 
  • Improving Prospects with Lenders: ESG compliance can improve a startup’s financing opportunities. Lenders are focusing on ESG-compliant startups with a low risk profile and sustainable prospects. By providing a thorough view of their practices, startups can attract potential lenders.
  • Attracting the right talent: A growing number of professionals are taking note of how serious companies are about ESG. Having a robust ESG framework can also help startups attract professionals who are passionate about making a difference to the environment, society and their industry. 
  • Building a great reputation: Businesses with a well-implemented ESG strategy can have better standards in workplace ethics, diversity, sustainability and transparency, thus leading to a greater reputation and brand image over time. 
  • Contributing to climate action: The effects of climate change are already felt across the world in the form of extreme weather, flooding etc, which can impact businesses adversely. Climate action is not optional and everyone, including businesses, must do their bit. Whether it’s the overall carbon footprint, energy efficiency or waste disposal plan, startups must have a clear approach to climate action.

Ensuring ESG compliance right from the start

Having an ESG framework demonstrates commitment to responsible business practices. Unlike established companies with legacy systems and age-old policies that might require an extensive overhaul, startups can implement these practices right from the beginning, thus averting costly rework later.

  • Since ESG and purpose are interdependent, startups must define a purpose. While ESG can provide a framework for implementation of strategy, a purpose can help pin down key areas to concentrate efforts and ensure effective decision-making.
  • They must identify key ESG risks relevant to their industry, use proper risk frameworks and outline a risk management strategy.
  • From the very beginning, startups must explore their major value sources i.e., risk, cost of capital, regulations, talent and growth.
  • They must clearly outline accountability (for implementation), execution priorities, metrics and reporting protocols.

Having a proper ESG strategy can help startups stand out from their competitors by fulfilling sustainability parameters and appealing to ESG-conscious buyers while lowering the cost of capital. They can mitigate risks and identify opportunities for growth by proactively building a thorough ESG strategy.

Climate change, social inequality and regulatory disasters can be extremely damaging for businesses. Startups that do not take these issues seriously could encounter serious consequences in the future. With ESG factors becoming increasingly critical for startups, demonstrating a commitment to sustainability, social responsibility and good governance can position them for success in the long term.