Why ESG Matters for Startups

Many of our earlier stage private company clients believe that ESG is mainly a concern of public companies (for an explanation of what ESG is, see this post).  They see the growing pressure on US publicly traded companies to report on environmental goals, workforce diversity or cybersecurity risk management from regulators like the US Securities Exchange Commission and large institutional investors like Vanguard or Blackrock and assume that their company isn’t subject to mandatory ESG reporting. However, in recent years we have seen ESG become more relevant to our private company clients, not only in the US but globally.

ESG’s relevance for private companies.  Many of the private companies we work with have stakeholders who expect them to meet basic requirements when it comes to ESG policies, risk management, data, and reporting. Understanding the importance of ESG to your investors, customers, and employees, and being prepared to explain how your company governs and responds to ESG issues is rapidly moving from “nice-to-have” to “must-have” for many private companies.  Here are some of the expectations your stakeholders may have about ESG:

• Investors. Many venture capital and private equity investors are concerned with how private companies manage ESG-focused issues as an indicator of future financial stability and performance.  Often investors have a responsible business component to their investment thesis premised on the belief that smart ESG strategies can help emerging companies lower their risk and cost of capital, attract and retain talent, build resilience, and increase value.
  • Many private companies are surprised to be presented with ESG-focused diligence request lists and covenants from their investors to adopt formal ESG policies focused on supplier risk, business ethics, data privacy or employment matters, or ESG reporting of metrics in line with certain basic frameworks. See our post “ESG Standards and Frameworks: Deciphering the Alphabet Soup”.  This is particularly salient for companies with EU investors that are subject to ESG reporting obligations including the Sustainable Finance Disclosure Regulation.

• Employees: Many of the companies we work with find that ESG efforts give them a competitive advantage in attracting and retaining talent, particularly with respect to younger employees.  Many companies, public and private, have found that building transparency and trust are key to attracting and retaining a talented and diverse workforce.
• Customers and Suppliers: Your customers and suppliers may be required to report ESG data in connection with their own regulatory obligations that will require them to get ESG data from you.  For example, as of June 2023, proposed rules by the Biden Administration would require many federal contractors to report their greenhouse gas (GHG) emissions, including the emissions of suppliers in their value chain (“scope 3 GHG reporting”).  Similarly, companies required to report under the EU’s Corporate Sustainability Reporting Directive (which includes many EU companies – whether listed or not – and ultimately may include their US parents), must produce scope 3 GHG reporting. You may receive ESG questionnaires and requests for your data to enable your business partners to produce these reports.
  • In addition, many B2B customers prefer to partner with brands they believe are transparent and share their values. They may have goals focused on supplier diversity, sustainable packaging, supplier business ethics, or reducing GHG emissions throughout their value chain.  To help them track progress on these kinds of commitments, business customers may request that you include ESG data when you submit a bid or respond to an RFP from them, and that you continue to submit ESG data throughout the term of their contract with you.
  • And even if you’re not in the B2B market, many consumers expect brands to be “ESG smart”. This may include having a sustainability strategy as well as communicating the company’s values and acting in accordance with them.

There can be advantages to a startup thinking about an ESG strategy before it receives that lengthy list of ESG due diligence requirements from an investor or a customer request for GHG emissions data.  It is easier and more effective to build ESG into your company’s DNA from the start and at your own pace.

Companies that are new to ESG should start with an objective ESG priorities assessment to identify a discreet set of E, S, and G priorities that align with their individual corporate purpose and business strategy. Take a look at our post “ESG Checklist for Startups” for an overview on how to get started operationalizing ESG.

In developing the company’s ESG priorities, it is important to look at industry-specific ESG impacts and challenges as well as input from key business customers and important investors about what ESG data or policies they may require or recommend.  Your company’s ESG priorities should be backed by foundational ESG policies and key ESG data (like your greenhouse gas emissions or your workforce diversity profile) that provide accountability to employees, and demonstrate to customers, suppliers, and potential investors that you are building value and mitigating risk.

As your company grows, your ESG strategy can expand to include things like identifying specific ESG goals (e.g., a Net Zero Pledge) and communicating your ESG strategy through your website and an Impact or Sustainability Report.