ESG-schmertz
ESG (Environment, Society, and Governance) is often perceived as a tool exclusive to big enterprises. This is because it is linked to corporate reporting, a concept not typically found in small businesses, privately-held companies, and startups. Many view ESG as a miscellaneous report that adds little value to the business. There are numerous examples of ESG being used absurdly. For instance, companies that are major polluters may still have high ESG ratings because they have an anti-corruption policy or promote ethnic diversity among their employees.
Regardless of our preferences, more venture capitalists (VCs) are now requiring their portfolio companies to report on their ESG activities and performance. The primary reason, interestingly enough, is because they, too, are being required to do the same. Consequently, the responsibility for ESG reporting trickles down the chain. Out of the blue, startups receive a concise, yet polite, email from their investors requesting their ESG report – and they needed it yesterday. As I've observed in several cases recently, the frustration is significant.
Here are a few tips to stay ahead of the requirements and avoid stress.
It’s about time
When's the best time to start addressing ESG? It's not necessary for a startup operating out of a garage, but it becomes pertinent around the time of a Series D or E funding round. At this stage, companies are usually preparing to go public or be acquired, and the few startups that have made it this far will likely raise another round of funding.
During this phase, they'll be partnering with larger, more regulated venture capitalists. They'll also be dealing with significant clients who may require ESG data as part of their contracts. Moreover, these companies may choose to raise additional funds from investment banks and other financial institutions, which have their own ESG requirements. Therefore, if you've reached this stage and haven't yet encountered the "ESG monster", now is the time to start preparing for it.
Where to begin?
The components of ESG - Environment, Social, and Governance - are not equivalent in their complexity or importance. By the time you consider ESG, your company likely already has policies for hiring, gender equality, transparency, anti-corruption, privacy, and data security. These elements pose a clear business risk through potential lawsuits, legal violations or damage to reputation. However, environmental considerations often lack representation at the board level and, in my opinion, are also more complex.
The question of where to start led the Global Reporting Initiative (GRI) to publish the framework for material topics, or "materiality assessment". This is a systematic analysis that incorporates what matters to the company, stakeholders, environment, and society. It guides organizations to concentrate on specific topics while omitting others.
And still, if I had to choose one component to begin with, I would choose environment.
Choosing the right framework
Choosing the right framework is crucial as it impacts not only the current report but also future ones. The first question to ask is whether the reporting requirement is mandatory or voluntary. Are we reporting to an official agency?
If the requirement comes from a regulatory source, or if you anticipate that a regulator will soon require compliance (as with the CSRD in the EU), their official framework should be prioritized. If the reporting is voluntary, it's advisable to stick to a widely used framework, such as the TCFD. Overarching frameworks like SASB, IFRS, or GRI can help structure the report and ensure completeness.
Greenhouse gas emissions, commonly known as "carbon emissions," are central to the environmental chapter. Why? They're the primary cause of climate change, posing a major threat to our planet's ecosystem and the prosperity of all species. Companies should include their carbon inventory in their ESG reports, detailing the tons of CO2e emitted across various activities - production, energy consumption, procurement, logistics, waste, and more. The GHG Protocol is the framework typically used for this purpose, categorizing emissions effectively for almost 20 years.
Consider these two principles:
- Avoid creating a new framework; there's likely a suitable one available off-the-shelf.
- Consult your stakeholders - investors, customers, financiers - to determine which framework would best integrate your reports into theirs.
Who owns the task?
Large companies with years of experience in ESG issues typically have dedicated teams, departments, and executives. The primary advantage of internalizing ESG capabilities is the team's familiarity with the organization, its functions, data, and decision-making processes. This familiarity can make an external consultant feel less informed.
However, hiring a sustainability or ESG team around series D or E funding stages may be premature. The concept of fractional Chief Sustainability Officers (fCSOs), who work part-time yet maintain a long-term relationship with the company, is appealing. They can integrate sustainability and ESG into the company's daily operations, not just its reports.
How to justify the investment in ESG?
Instead of detailing how sustainability can benefit your business or increase your profits, I'll put it plainly: it's necessary. Your business's growth and the global emphasis on sustainability will inevitably converge, likely sooner than later. While this might seem bothersome, you have the opportunity to transform it into a positive experience. By embracing sustainability, you can impress investors and customers, add purpose to your employees' work, and take responsibility for the future of our planet.