Why startups need an ESG strategy for a competitive edge

Before deep diving into ESG strategies, ESG is a term often heard but needs to be understood. Environmental, Social and Governance (ESG) is a leadership approach of a business that goes beyond its financial performance. Today, ESG has become a pivotal part of innovation in India.

India’s startup ecosystem has witnessed a notable surge in ESG funds, with a fivefold increase in just four years. The surge has been mainly due to the rise of innovation in India and increased awareness about this business approach. 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.

Investors, industry leaders, and governments are now noting how businesses are incorporating ESG strategies and practices into their core structure.

How Significant is an ESG Strategy?

While many startups understand the importance of ESG and its strategies, here’s how it affects the workings of a company.

An ESG strategy comprises three vital aspects:

  • Environmental Aspect: Businesses’ environmental impact, including carbon emissions, power and water consumption, material sourcing, and waste management.
  • Social Aspect: Evaluating how startups treat employees, customers, and stakeholders by focusing on various aspects such as:
    • Diversity and inclusion
    • Data protection
    • Human rights
    • Community engagement
    • Sensitivity to social issues
  • Governance Aspect: Assessing compliance with internal standards concerning policies, culture, inclusion, risk management, transparency, and accurate reporting. Adopting ESG strategies and practices allows startups to avoid penalties and negative publicity while minimising long-term business risks.

The Importance of ESG Strategy for Startups

  • Enhanced Operational Efficiency: Startups integrating an ESG strategy and framework can reduce costs through energy conservation, waste reduction, and overall operational efficiency.
  • Investor Attraction: Investors increasingly favour startups sharing their values, perceiving ESG-compliant startups as more mature and better positioned to outperform competitors. According to a PwC investor survey, 82% of investors believe companies should embed ESG in their corporate strategy.
  • Meeting ESG-Conscious Consumers’ Needs: To capture the growing customer base that prioritises environmental impact and social responsibility, ESG compliance becomes essential for startups.
  • Lowered Capital Costs: Incorporating ESG practices reduces regulatory and reputational risks, lowering borrowing costs and equity expenses. Improved operational efficiency and sustainability drive cost savings and financial performance.
  • Attracting Talent and Building Reputation: A robust ESG framework differentiates startups from competitors by promoting workplace ethics, diversity, sustainability, and transparency, ultimately enhancing reputation and brand image.
  • Contributing to Climate Action: Startups need a straightforward approach to climate action, addressing carbon footprint reduction, energy efficiency, and waste disposal. Climate change poses risks that can impact businesses adversely, making climate action imperative for startups.

Ensuring ESG compliance right from the start

Having an ESG framework demonstrates a commitment to responsible business practices. Established companies with legacy systems and age-old policies require an extensive overhaul. Instead, 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 strategy implementation, a purpose can help pinpoint 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 beginning, startups must explore their primary 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.

A proper ESG strategy can give startups an edge in the innovation ecosystem. Through curated startup accelerator programs, incubators are the perfect medium for assisting in creating curated ESG practices. The programs offer an edge and help stand out 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 harm businesses. Startups may need to learn how to tackle these issues, which is where business incubation centres like T-Hub exist.

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.