ESG metrics, measurement, and reporting go well beyond the hot topic of today. As we are covering the topic of ESG factors in startups, it is becoming very clear that reporting obligations will not only concern a growing number of entities, but ESG may be a useful tool to outperform competitors and stand out in the market where companies are not directly obliged to undertake ESG reporting. Choosing the right ESG strategy could be the deciding factor behind closed investment rounds, ensuring a sustainable growth of your business. So without further ado, let’s delve deeper into all the ways ESG will help your startup distinguish itself from the competitors.
What is ESG?
To start, let’s quickly return to the basics of ESG and refresh what they are about (for a more detailed look check out our other ESG-related posts) - ESG stands for E-environmental, S-social and G-governance, factors that sum up to the non-financial performance of an entity. In a growing number of countries (including all EU countries), the law requires certain large companies to disclose information on the way they operate and manage social and environmental challenges.
In the EU, Directive 2014/95/EU – also called the Non-Financial Reporting Directive (NFRD) – lays down the rules on the disclosure of non-financial and diversity information by certain large companies. At the moment, ESG reporting is mandatory for large public-interest companies with more than 500 employees, including listed companies, banks, insurance companies and other companies designated by national authorities as public-interest entities.
These companies have to publish information related to environmental matters, social matters and the treatment of employees, respect for human rights, anti-corruption and bribery and diversity on company boards (in terms of age, gender, educational and professional background).
ESG reporting is not a problem for the big players only – as those big companies monitor ESG factors, they may, and in fact they do, choose to cooperate with those that do not impact them negatively in terms of ESG. The choice of investment target, parameters of the facility agreement, inclusion into the panel of subcontractors – may all be based not only on (financial) performance but also on ESG metrics.
Outperforming by developing business relations
Relations with entities obliged to monitor and report ESG performance is one area in which ESG – compliance may allow you to outperform your competition. Being able to provide ESG-related information to your business partners and developing a decent ESG profile may lead to wider access to contracts from big entities (and note that almost 12,000 EU-domiciled enterprises are currently obliged to report ESG performance, with this number growing by month). In some big companies, an ESG questionnaire is one of the first steps of the process, with questions relating to hard data, not only to soft objectives. Having your homework done in the fields of e.g. corporate carbon footprint, non-discrimination or anti-corruption policy allows your company to have a head start on cooperation with the bigger players in the market.
Outperforming by internal optimization
It may be surprising to know that ESG measurement may deliver important data, based on which a significant optimization of internal processes is possible. By analyzing environmental, social and governance factors that impact your operations, you may identify performance leaks, reasons for losing employees, overpayments for external or internal processes or even unexplainable losses of contracts. Identifying imbalances in ESG metrics (such as a lack of a link between financial performance and stakeholders' expectations and values) and addressing them results in a better overall performance of the company.
Integrating ESG measurement into core business functions and tracking it together with financial KPIs will lead your organization towards balanced integration of processes. ESG strategies, if systemic and not ad hoc, provide for the possibility to find links within the organization that are easy to miss in a traditional analysis based on financial factors only, but may be crucial in optimizing internal processes.
Building your business on values
In his famous book “Start with why”, Simon Sinek wrote: “People don’t buy what you do; they buy why you do it.” A clear ESG policy is one of the ways to provide a clear message on why and how your company does what is does. It allows you to sharpen your communication both internally and externally, thus providing various motivation factors for employees, stakeholders and the wider community in which you operate. The stories of many entrepreneurs support this, showing that investment in ESG improved the performance of their companies and opened those companies up to new possibilities, and in so doing outperforming their competitors.
Related Posts:
How To Improve ESG Metrics In Your Startup? (by Julia Pycka, Associate, B2RLaw)
ESG Due Diligence: The New Standard For Investment Round (by Magdalena Zawiślak, Associate, B2RLaw)
ESG Investment Strategy (by Aleksandra Polak, Partner, B2RLaw)
