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Blog | Nov 22, 2023
WRITTEN BY Mona Saurén
When discussing ESG with seed-stage startups, the most common question we hear is: “where do we start?”. ESG is often considered challenging because of the belief that seed-stage startups cannot have a significant impact, or that their ambitious growth expectations don't align with a sustainable way of thinking. Meanwhile, ESG is gaining importance, not only thanks to rising customer and investor interest, but mounting regulatory pressures. The unfortunate fact is that practical advice for seed-stage companies embarking on this path remains scarce.
In this blog, we outline 3 concrete steps for founders starting to build their ESG strategy.
When forming any kind of strategy, it's important to first identify the risks associated with the company. This can be done through conducting a 3-step materiality analysis:
a. Identify material issues to industry and technology
Start off by compiling a list of issues that may be relevant to your startup’s operations. A great tool for this is the SASB Materiality Finder together with the MSCI ESG Industry Materiality Map, which can help pinpoint industry-related concerns that apply to your company. The Task Force on Climate-Related Disclosures’ recommendations also provide a concrete set of guidelines on climate-related risks and impacts that should be considered.
It’s good to keep in mind that while you may have a fairly clear list of issues based on your company’s industry classification, it's equally important to consider risks related to your supply chain and customer base. For example, a food manufacturing company could be classified as an industrial factory business. However, its customer base may consist of restaurants and its supply chain partners might be within the agricultural sector, which are exposed to very different operational risks.
To identify other potential issues relevant to a company's operations, you should assess product- and technology-specific risks by consulting news sources, relevant research, technologists, and regulatory specialists. It's also important to evaluate country and market-specific risks, such as legal requirements and political conditions.
b. Identify relevant stakeholders
After identifying the material issues related to your business and its value chain, it’s time to map out their impact on different stakeholders. We recommend categorizing stakeholders into primary (such as customers, investors, employees, and suppliers) and secondary (like communities, regulators, and media) stakeholders.
c. Rate issues by importance
Finally, to complete your material risk analysis and prioritize ESG work, rate your issues by importance and relevance:
The priority level of issues can be visualized on a materiality matrix. It's a common tool for illustrating ESG risks, and private companies can review existing matrices of their public peers to adjust their findings for industry relevance. Below you can find an example materiality matrix for a software company:
Once you’ve identified the material risks facing your company, it's time to develop a strategy aimed at mitigating or operationalizing the risks. This is where creating attainable goals and measuring progress becomes essential. Here are some practical tips for seed-stage companies:
Include at least the anticipated metrics – while it may seem biased, you will likely face questions about gender diversity and carbon footprint. That's why it's crucial to consistently track these metrics. You can draw valuable inspiration for these expected metrics from your investors' ESG questionnaire or for example the ESG_VC Framework.
Even the best ESG strategy is set to fail if you don't communicate your targets and get people on board. This includes transparent communication with internal and external stakeholders, assigning responsibilities, and being explicit about the progress you make:
Ensure leadership commitment: The board of directors is your ultimate decision-making body – so, it's crucial that they possess the necessary experience in and education on the topic. Make sure that the company’s ESG goals and efforts are defined in collaboration with and communicated to the board – ideally, ESG should be a recurring topic on the board's agenda.
Assign owners: In order for ESG efforts to remain active, the goals and metrics must have clear responsible parties pushing and monitoring them. Those actively involved in the respective areas should be responsible for overseeing the implementation of process and overall development. As your company later expands, the owners should ultimately be the “sense-makers in chief” leading the collaboration and development of their respective ESG topic.
Educate and communicate across your organization: Successful ESG implementation can’t be the sole responsibility of one individual within your organization. Those in charge of ESG efforts must educate and communicate to ensure ESG commitments are understood and shared across the organization.
Involve stakeholders through agreements and policies: To drive change, it's essential to communicate your set goals and ESG-related vision to your stakeholders. This may involve, for instance, incorporating ESG-related clauses into contractual agreements across the supply chain. To ensure that your startup’s values are reflected early on, it's important to commit employees to these values through an employee agreement. And these company efforts should also be reflected in its ESG policy and code of conduct.
Be transparent about progress: ESG is an ongoing journey for us all. While concerns like greenwashing remain, companies also face greenhushing. That's why sharing your journey, vision and commitment, even if not yet perfect, will enhance your transparency, make your efforts more tangible and leverage your knowledge. This approach also holds your company accountable for its efforts and ensures progress.
Collaborate with industry and communities: To really make sure you're adopting best practices, collaborate with industry peers to learn and share knowledge. This might also mean taking the stage at public events to spark discussion and communicate your efforts. Finally, to ensure growth, it's advisable to engage with communities that you share the same values with.
I’m always up for a chat around ESG practices in the world of venture capital and startups. If you are too, feel free to reach out at firstname.lastname@example.org