Environmental social governance (ESG) for startups isn’t just a new buzzword, or something that’s only important to social enterprises. In fact, more and more investors are taking ESG into consideration when making decisions about where to allocate their capital, so it’s essential that startups pay attention to ESG sooner than later.
Today, we’ll cover:
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What is ESG?
ESG, or environmental/social/governance, is a holistic leadership approach that includes issues beyond the traditional scope of a company’s bottom line. This includes thinking about the business’s environmental impact, employee culture, and the ethics of how the company itself is run.
As a startup, you probably have a thousand and one things on your mind as you grow your business, so you might not be thinking about ESG yet. But as investors try to decide who to trust with their capital, they’re investigating ESG as a means of mitigating future risk and predicting startups’ sustainability over time.
Let’s break down each piece of “ESG” for more details on what this approach entails:
1) E is for environmental
Environmental practices refer to a company’s impact on the environment. This includes things like carbon emissions, water use, packaging, waste management, material sourcing, and energy efficiency.
However, the type of environmental procedures you implement will depend on the type of startup you are. For example, if you’re engaged in manufacturing or perhaps a natural resources focused sector , you may worry more about emissions or safety than a SaaS company would.
By not complying with environmental regulations, a company risks huge regulatory penalties and bad publicity, which can be especially costly and detrimental to a startup.
EPA.gov provides a huge list of compliance cases, many of which were high profile enough to cause damage to even the largest companies’ reputations. Fines this substantial could cause the permanent closure of a smaller business, reversing all of the painstaking steps it’s already taken to comply.
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2) S is for social
The social aspect of ESG looks at how a company treats its employees, customers, and other stakeholders. This includes things like diversity and inclusion, human rights, and community engagement.
This is important when hiring candidates, engaging with customers, and creating a comfortable working environment for employees. Implementing tools and resources like RingCentral’s MVP can improve company culture and enable everyone to stay connected.
It even extends to data protection, privacy, and cybersecurity. If your company isn’t taking security seriously, you could face huge losses from a data breach. This includes critical information you need for operations as well as customer data.
Social factors are relevant to all startups, and this is clear in many high-profile cases where companies failed to implement the measures necessary to protect all data.
For businesses that employ people with disabilities, engage in philanthropic opportunities, and source product sustainably, the “S” also includes social inclusion and community relations.
Companies that advertise their participation in these practices tend to be more successful and favorably viewed. It’s important to keep several sets of eyes on marketing materials and ad campaigns to avoid promoting insensitive messages, whether intentional or not.
3) G is for governance
Finally, the “governance” part of ESG looks at how transparent and compliant a company is with regulations and ethical standards as they relate to policies, structure, and company culture. This includes things like board diversity, risk management systems, and accurate reporting.
Keeping current with governance is important to avoid penalties, but it’s also a way to build trust with investors and other stakeholders.
Investors look closely at company culture when evaluating risk and the resilience of your business. Complaints about harassment, evidence of bullying, employee burnout, and high turnover are all signs of a toxic workplace.
Adhering to good governance standards can be difficult and time-consuming, but it’s essential for maintaining a strong reputation and attracting capital. A leader will be able to foster a healthy work environment and be able to articulate how they do so.
The board of directors is responsible for corporate governance. This top-down approach encourages transparency, helps the company navigate difficult decisions, and protects the company’s interests.
When the board fails to do these things, it can be an early sign of a dysfunctional company, which raises a red flag to investors.
5 benefits of ESG for startups
Implementing and promoting ESG is critical for startups that want to be successful. It’s a lot of work, but there are several reasons it’s necessary.
1. It attracts investors
Angel investors and VC funds evaluate ESG factors when they make investment decisions. This is because these practices are becoming increasingly influential for market benchmarks and financial performance.
Addressing ESG concerns early on in your business development and planning can help increase your chances of getting funding and operating a successful business. It can help prevent you from experiencing civil litigation, fines, and social backlash.
More importantly, investments coming from DFIs (development finance institutions) are required to conform to certain ESG standards, while impact investors will only provide funding to businesses that demonstrate strong ESG adherence.
Focusing on ESG from the beginning will increase your likelihood of obtaining investment and can broaden your investor base.
2. It gives you a leg up on the competition
Many companies are beginning to prioritize ESG practices, and those that ignore it will inevitably lose out. It’s important not to be complacent because your competition is doing this too.
It may be challenging in the early days of a startup while you’re resource-strapped and struggling to get by, but ultimately it pays off when consumers and investors see that you’re a responsible business.
Short-term solutions may be cost-effective in the beginning, but sustainable, long-term results require a larger investment.
Consumers are also watching closely and choosing companies whose values align with their own. They’re more loyal to a company that shares the same beliefs and will shun brands that don’t follow environmental practices.
These practices work to drive growth by cultivating a customer base that values loyalty.
3. It helps you build trust with stakeholders
Building trust is essential for any business, but it’s especially important for startups. When you’re first starting out, you don’t have much of a reputation to stand on.
This is where ESG comes in. If you can demonstrate your commitment to corporate responsibility through ESG reporting and adhering to the UN Global Compact, you’ll be able to build trust with both internal and external stakeholders.
If you’re presenting at a venture capital pitch or investor meeting, for instance, being able to discuss how you prioritize sustainability can help earn trust. This is especially helpful if there is a negative reputation or scandal associated with your company.
It’s important to be proactive about these issues and demonstrate that you’re taking steps to improve. Investors will appreciate your transparency and commitment to the long-term success of the company.
4. It boosts employee retention
A good work environment is a critical part of maintaining a healthy startup. If employees are unhappy, they’ll leave for greener pastures.
ESG policies and practices can help improve the work environment by engaging your team and giving them a voice in company decisions. This improves employee happiness and retention rates.
In addition to making employees feel like their opinions matter, ESG also creates a sense of community within the workplace by focusing on common values. RingCentral helps boost morale because it gives you all the features you need to engage with your team: message, video, and phone all rolled into one app:
This helps foster team spirit and unity, which boosts employee productivity and reduces the chances of losing valuable talent. Keeping your employees happy is an important part of growing a successful company.
5. It improves your reputation
Your reputation is everything. It’s the first thing people think of when they hear your company name and it can make or break your business.
A good reputation attracts customers, investors, and business partners while a bad one repels them. This is why it’s so important to focus on building a positive reputation from the start.
ESG can help you build a positive reputation by ensuring that your company is associated with responsible and sustainable practices. This will make people more likely to do business with you and recommend you to others.
It’s important to remember that your reputation is always at stake, so it’s worth the effort to focus on building a good one.
How to integrate ESG into your startup
We’ve established why it’s important to develop ESG commitments from the start, but it’s not always easy to do. Here are a few ways to do it.
1. Identify the relevant ESG factors for your startup and industry
Not all ESG factors will apply to your business, so you have to find the ones that do. The best way to do this is by looking at the issues that are most relevant to your industry and company.
For example, if you’re in the fashion industry, labor rights and sustainability are likely to be more important than they would be for tech companies. Once you’ve identified the most relevant ESG factors, you can start developing policies and practices around them.
Start by studying your stakeholders, what they value, and what drives their success. Include employees, customers, regulators, suppliers, and anyone else who has a relationship with your business.
The Sustainable Accounting Standards Board (SASB) is an excellent resource during this stage of development.
2. Create an ESG task force
If you want to make sure that your company is integrating ESG properly, it’s a good idea to create a task force dedicated to the issue. This group should be responsible for developing and implementing policies, communicating with stakeholders, and monitoring progress.
This emphasizes the importance of these practices and gets everyone in your company involved with the process. It also helps ensure that ESG efforts are ongoing and sustainable, rather than something that happens only once or twice a year.
Another way to support employee collaboration through this process: invest in easy-to-adopt collaboration software for your team. These all-in-one platforms allow your team to keep track of important files, create task force group chats, and even hop on a phone or video call to sort out next steps. RingCentral MVP is one of the most feature-rich options out there today—look how clean and simple it is to use:
3. Develop an ESG reporting strategy
Identifying the relevant ESG factors won’t get you anywhere unless you use this information. Your company needs to report on its ESG performance and make this information available to stakeholders.
This can be done through an annual report (you can use a report creator to prepare one), a website, or any other form of communication that’s appropriate for your industry.. It’s also important to keep track of progress over time so that you can measure the impact of your ESG efforts.
In addition to the SASB, the Global Reporting Initiative also focuses on sustainability reporting and performance. You can use these resources to standardize your own reporting practices.
4. Weave ESG throughout your startup’s investment and governance documents
ESG should be woven into the fabric of your company, not just something that’s tacked on at the end. This means that you need to integrate it into your investment and governance documents from the start.
This will send a strong signal to stakeholders that you’re serious about these practices and that they’re important to your business. It will also ensure that the benefits of ESG can be felt throughout your organization and not just in some isolated programs or policies.
There are a number of resources available to help you with this process, including the UN Global Compact, which provides tools for integrating ESG into company governance.
You can also draft your compensation plans, bonus structure, and requirements for promotion so that they’re dependent on certain ESG KPIs. This requires that you’ve already implemented accurate reporting of your ESG achievements.
5. Advertise a B Corp certification
One way to signal your company’s commitment to ESG is by advertising a B Corp certification. This designation is only given to companies that meet rigorous standards of social and environmental performance, accountability, and transparency.
It’s a voluntary certification, but it’s one that can help you attract customers, employees, and investors who are interested in supporting businesses that are making a positive impact.
This certification is managed by B Lab. This nonprofit administers this certification after you apply and complete an audit.
Include RingCentral in your ESG efforts
ESG is an important part of a sustainable business model, but it’s not the only thing you need to consider. You also need to make sure that your business is profitable and that you’re providing value to your customers.
However, if you can integrate ESG into your business model, you’ll be in a strong position to attract the attention of purpose-driven consumers, employees, and investors. And that can only be a good thing for your business in the long run.
RingCentral can help support your ESG efforts. Our cloud-based communications platform is a sustainable communications option that enables your business to make use of existing resources to keep communication lines open and collaboration going strong. RingCentral MVP provides voice, video, and text, enabling anywhere, anytime access for your employees and customers. See how our startup solutions can help you with your ESG efforts today.
Originally published May 17, 2022, updated Dec 30, 2022