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ESG – or environmental, social and governance – is an umbrella
term for a broad range of non-financial factors to evaluate a
company’s operations and its resilience and sustainability over
time. ESG focuses on non-financial factors as a way to judge future
performance and stability. From a company’s perspective, ESG
can be viewed as a leadership approach that considers multiple
stakeholders and interests, both to unlock new opportunities and to
mitigate risks. This article unpacks the “E”,
“S” and “G” in the context of startup
companies.
“E”
Environmental factors refer to a company’s impact on the
environment, including greenhouse gas emissions, energy efficiency,
water use, packaging, waste management, material sourcing, and
biodiversity. Environmental sustainability and climate risk
management are hot topics and increasingly important to a wide
range of stakeholders, including investors, employees, customers
and suppliers. However, there is no “one size fits all”
approach to environmental impact management.
The environmental factors that are material to your company will
vary depending on industry, business model, the company’s
objectives, and its stage of development. A consumer products
company will likely focus on packaging and materials sourcing; an
early-stage life sciences company may focus on water use and waste
management; a technology company may start by measuring energy
efficiency and a transportation startup will necessarily be focused
on carbon emissions.
“S”
Social factors look at how a company treats its employees and
operates in society. This includes factors such as employee
wellbeing, labor standards, diversity, equity and inclusion (“DEI”), racial
justice, pay equity, human rights, community relations, workplace
safety, supply-chain management and other human capital and social
justice issues. Recently DEI has been particularly important in the
startup ecosystem, with many investors focused on the DEI efforts
of their portfolio companies to attract and retain a diverse
workforce.
Data protection, privacy and cybersecurity are also considered
social factors. These are important for companies at any stage that
collect or retain sensitive or personal data. Cybersecurity
incidents can lead to significant operational, financial, and
reputational damages, not to mention legal liability. Furthermore
with the far reach of data privacy regulations like the California Privacy Rights Act (CPRA) and GDPR, ensuring proper handling of personal
information and other sensitive data is critical for companies even
in the early days.
“G”
The “G” in ESG focuses on governance, which
encompasses a company’s internal structure, policies and
processes. It emphasizes risk management, business ethics and
compliance processes, executive compensation, anti-bribery and
anti-corruption efforts, and supply chain management. The
“G” in ESG also includes a company’s corporate
governance meaning its Board of Directors (or equivalent governing
body), including effectiveness and oversight, the diversity of the
directors (or their equivalents), and core shareholder rights.
For a discussion of how ESG is relevant to startups, even at an
early stage, see this article.
For more on ESG standards and frameworks, see this article.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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