As the global focus on environmental, social, and governance (ESG) matters has continued to evolve and shift over the past few years, companies that are early in their strategic ESG journeys may find that they too can become the subject of stakeholders’ ESG expectations. While it remains the case, particularly in the U.S., that public companies are more likely to face ESG-related scrutiny, increasingly private companies, including startups and pre-IPO corporations, may find that ESG implications are working their way into business-to-business contracting and third party requirements.

However, for many smaller organizations, navigating the vast world of ESG, which can include everything from greenhouse gas emissions reporting to value chain human rights considerations to biodiversity and Indigenous rights considerations, can seem incredibly costly and daunting.

In this short article, we outline five strategies that startups should consider in implementing ESG.

Key to understanding an organization’s ideal path forward with respect to ESG is understanding the organization’s stakeholders. Appreciating the full range of stakeholders — including owners and capital providers, employees and contractors, insurers, customers, business partners, and the communities in which the company does business — can help an organization triangulate its ESG dos and don’ts.

Moreover, as ESG reporting requirements and expectations have entered the private capital space, many US-based private equity and venture capital funds have started to review and ask about a young corporation’s ESG program and policies, as part of those investors’ due diligence, review, and investment processes. ESG policies can help private capital providers better understand the goals, strategy, and operations of a startup; appropriate ESG policies can also showcase how a company is thinking about its business risks as well as its impact on various stakeholders as it continues to grow. Investors in private capital, including state pension funds, can have divergent interests and expectations with respect to the environmental and social practices and expectations of the private capital in which they invest. Young companies can therefore benefit from understanding not only their stakeholders’ interests, but also the expectations of any of their capital providers’ stakeholders as well. The ultimate purpose of any ESG strategy should be to show the long-term value that a young corporation intends to deliver to its capital providers, both from a risk mitigation and value creation perspective.

In addition, for many startups the talent pool they are looking to capitalize on is sensitive to various ESG issues. According to a study by SHRM Research, 41% of workers consider their company’s ESG initiatives to be important, with that number increasing to 46% for Generation Z workers and 55% for millennials. This means that a startup focused on being appropriately sophisticated in relation to its approach to ESG, even if it does not already have a formal program, may have a leg up when recruiting talent. Finally, for startups looking to establish a customer base of primarily large companies, having a sophisticated ESG strategy that can fit into their customers’ overall expectations for their supply and value chains will, for the time being, give them a competitive advantage, particularly if their company-customers are already public. However, the time is coming when having a sophisticated ESG strategy will simply be a cost of doing business with large organizations.

ESG can be impossibly broad. For startups and other companies early in their strategic journeys, incurring costs for efforts that are often viewed as “voluntary” at this point, particularly in the US, can seem unnecessary at best and like a bad use of limited resources at worst. For this reason, prioritizing environmental and social risks that might move the financial needle over the near- and mid-term can be an appropriate way of not biting off more than the young corporation can chew. Identifying key areas of potential vulnerability given the company’s business can not only help the company get ahead of potential issues in time to make necessary changes, it can also open up avenues for innovation that may present further opportunities for growth and revenue. Strategic ESG risk screening tools such as RiskHorizon helps clients identify key areas of ESG-related risks specific to their organization’s geographic, industry, and operational footprint. Risks to the corporate brand often should be given specific and careful attention, as an early hit to brand recognition or reputation can have a more disastrous impact on companies that have yet to have the time to establish a long track record of navigating business challenges.

For smaller, cost-conscious organizations, understanding what areas of internal ESG expertise the organization has and whether affordable or free external resources are available can be a game changer. Legal, compliance, and audit expertise are increasingly becoming integral to establishing effective ESG strategies that mitigate, rather than create or exacerbate, risks. For young companies that have yet to hire their first lawyer or compliance professional or establish an internal audit function, these considerations should factor into how much they will undertake with respect to ESG and how quickly. In contrast, many industries and trade organizations have established their own well-considered standards and ESG focus groups. While antitrust matters should always be appropriately considered, these standards and groups can provide young companies with a leg up on the types of ESG matters they should consider. They can also connect them with third parties, including consultants and other ESG expertise providers, who can help them navigate both the breadth and depth of ESG.

For most companies, compliance considerations are inevitable. Whether we are discussing compliance with existing health and safety standards, labor laws, environmental regulations, ethical business requirements, sanctions, antibribery, anticorruption and trade requirements and considerations, or securities laws and listing requirements, compliance is a requirement for corporate life. Layering ESG considerations on top of growing compliance requirements as the company matures can allow a startup to capitalize on its compliance requirements, producing more robust ESG programs and utilizing cost efficiencies. For example, as a company is adopting compliance functions to address ethical business requirements — including those relating to sanctions, antibribery, anticorruption, and trade considerations — the company can choose to extend its new internal controls to more broadly address supply and value chain sustainability and human rights considerations. The startup adopting controls and procedures around labor and employment laws can consider how to effectively and appropriately build in diversity, equity, and inclusion. Utilizing its growing compliance functions can be cost effective and produce more robust, responsive, and resilient ESG strategies.

Finally, the startup should always have the next stage in mind. Whether the next stage is private capital, IPO, or simply greater strategic growth for a period of time, understanding how ESG expectations will likely shift in that stage can help the young corporation stay focused and prioritize what matters in the near term. Of critical importance is understanding the data-related expectations at every stage: will the company need to have three years’ worth of data with respect to particular ESG metrics in two years’ time? Given the pace of change in the world of ESG, having outside advisers that guide the startup not just today, but through the next stage, can ultimately be more cost effective than pinching pennies today. And while many US startups are not legally required to have significant ESG programing in place to start, thinking about ESG early can have real benefits at every stage of development, including fundraising, growth, and IPO. 

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