What is ESG? A Primer for Startups

ESG – or environmental, social and governance – is an umbrella term for a broad range of non-financial factors to evaluate a company’s operations and its resilience and sustainability over time. ESG focuses on non-financial factors as a way to judge future performance and stability.  From a company’s perspective, ESG can be viewed as a leadership approach that considers multiple stakeholders and interests, both to unlock new opportunities and to mitigate risks.  This article unpacks the “E”, “S” and “G” in the context of startup companies.

“E”

Environmental factors refer to a company’s impact on the environment, including greenhouse gas emissions, energy efficiency, water use, packaging, waste management, material sourcing, and biodiversity. Environmental sustainability and climate risk management are hot topics and increasingly important to a wide range of stakeholders, including investors, employees, customers and suppliers. However, there is no “one size fits all” approach to environmental impact management.

The environmental factors that are material to your company will vary depending on industry, business model, the company’s objectives, and its stage of development. A consumer products company will likely focus on packaging and materials sourcing; an early-stage life sciences company may focus on water use and waste management; a technology company may start by measuring energy efficiency and a transportation startup will necessarily be focused on carbon emissions.

“S”

Social factors look at how a company treats its employees and operates in society. This includes factors such as employee wellbeing, labor standards, diversity, equity and inclusion (“DEI”), racial justice, pay equity, human rights, community relations, workplace safety, supply-chain management and other human capital and social justice issues. Recently DEI has been particularly important in the startup ecosystem, with many investors focused on the DEI efforts of their portfolio companies to attract and retain a diverse workforce.

Data protection, privacy and cybersecurity are also considered social factors. These are important for companies at any stage that collect or retain sensitive or personal data.  Cybersecurity incidents can lead to significant operational, financial, and reputational damages, not to mention legal liability.  Furthermore with the far reach of data privacy regulations like the California Privacy Rights Act (CPRA) and GDPR, ensuring proper handling of personal information and other sensitive data is critical for companies even in the early days.

“G”

The “G” in ESG focuses on governance, which encompasses a company’s internal structure, policies and processes.  It emphasizes risk management, business ethics and compliance processes, executive compensation, anti-bribery and anti-corruption efforts, and supply chain management. The “G” in ESG also includes a company’s corporate governance meaning its Board of Directors (or equivalent governing body), including effectiveness and oversight, the diversity of the directors (or their equivalents), and core shareholder rights.

For a discussion of how ESG is relevant to startups, even at an early stage, see this article.

For more on ESG standards and frameworks, see this article.