ESG for seed-stage startups - the first 3 steps to build a solid ESG strategy

In this blog, we share learnings from our ESG breakfast organized together with the Finnish Startup Community and guest speakers from Onego Bio and Twice Commerce – honing in on the three steps to build your startup’s ESG strategy.

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.

Step 1: Identify material ESG risks and opportunities

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.

To help identify stakeholders and understand their significance to your business, you can use visual stakeholder mapping templates, such as those available on Miro or Stakeholder Map.

c. Rate issues by importance

Finally, to complete your material risk analysis and prioritize ESG work, rate your issues by importance and relevance:

• Importance to business (high, medium, low) – Evaluate the potential costs that might actualize if the issue is not controlled or mismanaged. Alternatively, consider if there is a business opportunity to be leveraged in the risk identified.
• Importance to stakeholders (high, medium, low) – Evaluate stakeholders' interest on the particular issue, their power to influence the business and to what extent your company can actually impact the matter.
• Relevancy (current, future, no/low impact) – Evaluate the likelihood of the issue being or becoming relevant in the future.

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:

Step 2: Define goals and metrics to track the progress

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:

1. Start by making your goals more achievable, and not too ambitious. They can always be updated as the company grows.
2. Regularly track and update metrics to keep the level of motivation high and celebrate your achievements. Ensure that metrics evolve as your company matures.
3. Align your goals with the overall business strategy: they should contribute to your bottom line, brand, and reputation.
4. Foster collaboration across the organization to ensure that goals are defined using input from different positions within the company.
5. Feeling stuck? Seek inspiration from existing frameworks, such as the UN Sustainable Development Goals, the Task Force on Climate-Related Financial Disclosures, and the Climate Disclosure Standards Board.

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.

Step 3: Engage and communicate with stakeholders

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 mona@maki.vc