Striking a Balance: Navigating ESG Principles in Startup Realities

The last five years have witnessed a growing corporate focus on integrating Environmental, Social, and Governance (ESG) principles into the fabric of business, embodying stakeholder capitalism. However, a question comes up: does focusing on ESG take away the limited time and resources that startups already have? Should startup founders first focus on getting their business up and running before thinking about ESG issues?

But actually, startups have an advantage over big companies here. Big companies might have to change a lot of things they already have, like their stuff, products, and how they do things, to fit with ESG. Startups, on the other hand, can start with ESG ideas right from the beginning, saving them from having to redo things later. And this can help them quickly find the right customers for their products without getting off track.

Here presents an innovative founder approach to initiate their ESG journey.

Commence with a Clear Purpose

Purpose is like the main reason a company exists. It’s about what the company wants to do that nobody else is doing. Think of it like this: if the company wasn’t here, what would be missing from the world? Can other companies easily do the same thing, or does this company bring something special that people are willing to pay for? This purpose is more than just a name or how the company talks about itself. When the people working at the company feel like their own personal reasons for being here match up with the company’s goal, they get really involved and excited. This purpose also gets the attention of important people and helps the startups know where to focus and make choices, especially when things get tough. Startups often do well when they have a strong purpose that comes from the founder’s passion to fix a specific problem.

Let’s talk about how Purpose and ESG work together. ESG is different from Purpose. ESG helps businesses follow certain rules to match their goal, plan, and the risks they might face. It’s like a useful guide for making decisions. If a startup only has Purpose without ESG, it’s hard to measure and know if it’s really working well. It’s like having a goal without a clear plan. On the other hand, if a startup only thinks about ESG without a clear purpose, it might just become a list of things to do, without a real focus. Purpose helps founders know where the startup can shine and stand out, instead of just doing what everyone else does. It’s like finding a special place where the startup can make a difference, not just being like any other company.

In ESG, “E” stands for Environmental, “S” stands for Social, and “G” stands for Governance. These three letters represent different aspects of how a company operates and its impact on various areas.

Environmental (E)

This focuses on a company’s impact on the environment. It includes factors like energy consumption, pollution, waste management, and carbon emissions. Companies with strong environmental practices often aim to reduce their ecological footprint and promote sustainability.

Startups should decide on goals to use less energy and resources that harm the environment. Surprisingly, only 7% of startups have plans to make no net harm to the environment. However, many investors think this is important because of rules about being clear about these things. Following these climate goals is important for the companies’ investors put money into. They can start by keeping track of how much energy and resources they use with their utility bills. Starting this plan early helps startups include being eco-friendly when they grow, which also stops them from getting a bad reputation and having problems in their supply chain.

Social (S)

The social aspect relates to how a company interacts with its employees, customers, communities, and other stakeholders. It encompasses issues like labor practices, diversity and inclusion, employee well-being, and community engagement. Companies with a strong social focus prioritize fairness, diversity, and positive relationships with their stakeholders.

For startups, it’s important to make a strong agreement with employees. This means giving them fair pay, creating an environment where everyone feels included, and providing support for mental health. Because there aren’t enough workers available, companies are competing to hire the best people.

Governance (G)

Governance refers to the way a company is managed and controlled. It includes factors such as board diversity, executive compensation, shareholder rights, and transparency in decision-making. Strong governance ensures that a company operates ethically, with accountability and proper oversight.

Imagine you’re part of a startup that makes cool gadgets. Governance is like the rules and people that make sure everyone is doing their job fairly and honestly. Here’s how it works:

• Board Diversity: A diverse board with people from varied backgrounds and viewpoints helps make better decisions and avoids narrow thinking.
• Executive Compensation: Fairly paying top leaders ensures a balanced approach and motivates all employees.
• Shareholder Rights: Investors who own part of the company should have a say in important decisions.
• Transparency in Decision-Making: Openly discussing decisions prevents confusion and distrust.
• Ethical Operations: Doing business ethically, considering environment and people, is essential.
• Accountability and Oversight: Checks and balances prevent unfair actions and poor choices.

Conclusion

Companies that do well with ESG get five good things: they’re safer, it costs them less money, they follow the rules, they grow more, and they can find and keep good workers easily. When startups start with a strong purpose and follow ESG rules from the beginning, they become better than others at what they do.

Think of purpose as a guide for making important decisions in specific areas, and think of ESG as a way to avoid problems in important parts of the business. For startups, there are three big things to focus on: how they impact the environment, how they treat their employees, and how they manage their business. It’s good if startups have clear goals for each of these areas. The people who start the company should choose who’s in charge of making sure these goals are met, use numbers to show how they’re doing, and keep their team and the board informed about how things are going. This helps the startup stay on track with their goals and also with other important things they’re working on.

Source:

1. https://hbr.org/2022/11/startups-need-an-esg-strategy

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