ESG got more airtime at this year’s SuperVenture conference in Berlin as investors pay closer attention to the impact their investments have on the world.
A report by Amazon last year found that 70% of early-stage European VC investors surveyed said they had requested detail on startups’ sustainability strategies prior to investing, and more than half declined an investment if they had concerns.
With ESG climbing up the agenda, London-based firm Balderton Capital has released a guide to help startups navigate best practices.
We spoke to Elodie Broad, Balderton’s head of impact and sustainable future goals, about the importance of ESG and where startups should focus their efforts.
PitchBook: Why are VCs and startups paying more attention to ESG now?
Broad: A number of the global challenges and societal expectations have really evolved and become really visible in recent years, putting unprecedented pressure on corporates to take responsibility for some of the impact they’re having, especially in the financial system.
Institutional investors felt that societal pressure first and that has now trickled down to the public markets and PE, and now VCs are feeling that trickle effect indirectly through the pressures and responsibilities that our own investors are feeling themselves.
But there is also the bottom-up push, whereby employees or consumers want to see more commitment to sustainability and impact in the companies of tomorrow. I think that’s really a real catalyst for making that agenda so prominent in the startup ecosystem.
There’s a parallel between digital transformation and sustainability transformation as in it starts off as something very abstract and fluid that no one really knows how to grapple with but ultimately it becomes integral to how you build a business.
Why has it taken longer for the VC and startup community to embrace ESG than PE?
One is ownership structure. We’re only ever going to be minority shareholders and therefore, we’re not in a position of control. VCs can make ESG as attractive as possible to get companies to be more proactive but we can only influence, not force them to implement policies.
The second big difference is just the nature of the underlying asset and where they are on their growth journey.
Aside from doing good for the environment and society, are there any benefits to startups?
If you think about all the different stakeholder groups that are going to be integral to a company’s performance and value creation, you start with the employees. Even with some of our seed investments, we start talking about ESG in the context of it helping you attract talent, because we know that the new generation of talent wants to work for more purpose companies, or at least companies that care.
For B2B companies, larger corporates are increasingly looking at ESG as part of procurement criteria so it can make a huge difference if early on a startup can articulate their thoughts on ESG and how it applies to their business. And, with B2C companies, there’s a growing body of evidence that more consumers do care. If they’re faced with two products that are just as good as each other, they will pick the one that’s more sustainable. Future investors are also increasingly scrutinizing ESG performance and data.
Where should investors and startups start when it comes to ESG policies?
There’s no right or wrong time to start but having a strategy sooner is definitely going to be easier in terms of the complexity or ease of implementation, costs, etc.
I would say diversity and governance are where we start with founders. For early-stage startups, there’s a unique window of opportunity as they start building out their teams to think about diversity so that’s something we focus on in the context of their first hires. And governance is the bedrock of so many things. To have a strong approach to the environmental and social responsibility side, it has to be underpinned by strong governance and that’s something you can start early on.
Regardless of what you’re building as a company, sustainability is relevant but your efforts should be proportionate with where you’re at on your growth journey. Typically climate and diversity are blanket requirements across all companies but there’s no one-size-fits-all when it comes to ESG and you need to prioritize what makes sense to you and your business.
What are some of the challenges for startups when it comes to ESG?
Startups are facing lots of competing priorities, particularly early on, and some of those priorities are more directly tied to their imminent survival. So there’s a lot of resource constraints and early-stage startups can easily find themselves overwhelmed by ESG. You can’t at that stage hire a dedicated ESG person so it often falls to the founder or CEO.
It’s rare that I have a conversation with a startup that doesn’t want an ESG policy but there’s more of a question mark for them as to whether they can move as fast as they’d like because of all the other things they’re dealing with.
Is regulation a hindrance or a help for startups?
Startups are feeling the impact of ESG regulations indirectly through their investors and potentially other stakeholders. The regulatory tailwind is something we talk a lot about to our companies, this is not something that is impacting them today, but over time we’re seeing the thresholds of those regulations coming down in terms of the number of employees and revenue size, etc.
If the objective is hyper growth, then there’s very quickly going to be a convergence of the two and the next thing you know, you move into the scope of regulation. Regulation remains very fluid and very subjective so it’s really for us as investors to accompany and mobilize the companies in our portfolio on their ESG journey.
