The Smarter Startup

ESG: Coming Soon to Startups – and their CFOs

Startups that proactively embrace ESG policies, metrics, and reporting find benefits beyond the obvious good-for-the-planet motivations.

Businesses have come a long way when it comes to addressing environmental, social and governance (ESG) concerns. From being on the fringe a decade ago, virtually all larger firms now report on their ESG activities, and some even publish separate annual reports on sustainability and the “triple bottom line” measuring profits, planet and people. Such focus is also increasingly true among investment firms, pension funds, foundations, private equity investors and venture capital funds, all of whom have growing pressure from shareholders, trustees and limited partners to demonstrate precisely how well ESG mandates and policies are being fulfilled.

For years, the start-up ecosystem has been relatively exempt from this pressure. This isn’t because startup founders and their employees aren’t interested in ESG; on the contrary, the demographic most likely to be involved in early stage companies is also the one most likely to care deeply about ESG and purpose-driven employment. Instead, it’s because startups were thought to be either too small to have much in the way of measurable ESG footprints, or too busy building MVPs, scaling SaaS business models and managing short cash runways to devote much time and attention to tracking ESG.

This is changing, and rapidly. In fact, startups that proactively embrace ESG policies, metrics, and reporting are finding a number of benefits beyond the obvious good-for-the-planet motivations.

Employees Care About ESG

First, millennials overwhelmingly want to work for companies with purpose-driven, ESG and social impact principles. In fact, according to a Fast Company survey last year, 75% of them will accept less compensation if they can work for a firm they see as environmentally responsible. This is translating directly into a recruiting advantage when competing for hard-to-get millennials, particularly the high-end data scientists, developers and computer engineers so crucial to scaling a startup.

VCs Care About ESG

Secondly, venture capital investors are increasingly seeking ESG-related information from their portfolio companies in order to report upstream to their limited partners. Adding ESG criteria, even if at a modest level, to the financial and cap table information provided to a venture investor speaks volumes about how the company thinks about risk/reward, impact, governance and sustainability, which may in turn render it more attractive for subsequent financing rounds.

Customers Care About ESG

Finally, customers care. Some two-thirds of consumers in a 2018 Nielsen survey will pay more for sustainable brands, and a 2018 World Economic Report noted 42% of a startup’s reputation is based on customer perceptions. Add the two together, and startups that visibly embrace ESG principles have a pretty good shot at enhancing their brands in the marketplace.

Who Should Manage a Startup’s ESG?

A logical question for startups, though, is just who should be managing ESG at small, venture-backed companies. Easy – the CFO.

A logical question for startups, though, is just who should be managing ESG at small, venture-backed companies. Easy – the CFO.

CFOs are the natural owners of sustainability performance and reporting because of their position as stewards of a company’s financial information and metrics. Investor relations, external reporting, and operational/financial risk management are all areas already solidly in the CFO’s domain, and all can be expanded to include ESG and triple-bottom-line measurements.

At Burkland, we work with startups of varying sizes across a broad number of industries, and we see firsthand how hard founders and management teams work to stand out from the crowd. It’s clear that the importance of ESG is increasing across several stakeholder groups important to startups, and companies able to embed an ESG discipline early in their lifecycles are going to differentiate themselves from their peers. At the same time, they will build goodwill with their investors, attract and retain good employees, and endear themselves with their customers, all while helping the planet and its people. What’s not to like?

If you’re running a startup, do yourself and your company a favor. Build ESG into your mindset, and ask your CFO to help you frame the right metrics to measure. Connect doing well with doing good, and develop ways to communicate it. Your team, your customers and your investors will be glad you did.