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About ESG_VC
ESG_VC exists to help early-stage companies and their investors measure and improve their ESG performance.
Established in 2021, it is led by a steering group of funds and industry bodies, and is proud to count more than 250 VC firms among its members spanning UK, Europe, Israel, USA, and other global markets, all working together to provide a pragmatic approach for start-ups to harness the value of ESG.
ESG 101 for start-ups
In the VC context, ESG refers to the principles of Environmental sustainability, Social responsibility, and robust Governance that should be instilled in a company’s culture and practices. These principles are universal though practice will vary by operating jurisdiction, growth stage, industry, product, and business model of a company. These principles and practices are the primary focus of this guide, underpinned by sound business responsibility and ethics.
How is ESG different to impact?
In the VC context, impact refers to the external outcomes of a business’ products and services. We believe that every business can explore how it can deliver positive societal impact through its core products and services and encourage them to do so.
To be truly sustainable, a business should seek net positive outcomes through both exemplary ESG practices and net positive product or service impact.
The moral imperative
From climate change and biodiversity loss, to economic uncertainty, human rights violations, social unrest and growing inequalities, we cannot ignore the significant global crises we’re collectively facing. We have a responsibility towards future generations not to leave the world a worse place than we found it, and contribute towards building a better, brighter future for all.
Founders: If you are thinking big, and building something that you believe will last, then you have a moral imperative to ensure that it ultimately makes the world a better place.
The commercial imperative
As businesses grow, ESG factors transition from optional to imperative. Investors, employees and customers increasingly expect improving ESG performance. Early incorporation of ESG processes will benefit companies by mitigating risks, attracting and retaining talent, and accessing capital.
Winning the talent war: Your people are your greatest asset and the competition for top start-up talent is rife. In the war for talent, a commitment to diversity and sustainability is a great differentiator.
Immediate cost savings: While doing the right thing by people and the environment may sometimes come at a price, there are also some ways in which more sustainable practices help businesses save costs. Examples include energy efficiency initiatives to reduce energy usage, reduced use of raw materials and packaging, and reduced shipping costs through use of local suppliers.
Access to funding: VC investors are increasingly taking company sustainability into consideration when making decisions about where to allocate their capital. This is mainly driven by their belief that businesses built on strong environmental, social and governance foundations will outperform those who aren’t, and also driven by their own investors’ ESG-related demands.
Competitiveness and differentiation
B2C: Consumers care about sustainability. A recent study found that products making ESG statements averaged 28% growth over a five-year period, versus 20% for products that didn’t.
B2B: Organisations are increasingly assessing vendor climate, human rights and other sustainability commitments in their procurement processes and putting clauses in place to leverage their supply chain to drive their ESG goals. This trend is set to strengthen as new regulations such as the Norwegian Transparency Act, the German Supply Chain Due Diligence Act, and the EU’s proposed Corporate Sustainability Due Diligence Directive are rolled out to hold larger enterprises accountable for ensuring that human rights and environmental considerations are observed across their operations and supply chains.
Reporting and compliance
The EU’s Corporate Sustainability Reporting Directive (CSRD), aims to bring sustainability reporting in line with financial reporting and applies to both listed companies and private companies that meet two out of three of the following criteria: more than 250 employees, a turnover of over €40 million and over €20m total assets, impacting more than 50,000 companies or three quarters of business in the European Economic Area.
Thresholds for existing requirements are expected to come down. For example, the EU Directive on Pay Transparency requires employers with 250+ workers to report their gender pay gaps every year, and employers with 150-249 workers every three years. This threshold will be lowered to 100 workers by 2028. Similarly, it is anticipated that carbon accounting will become expected of businesses of all sizes in the years to come.
Materiality is an organisation’s ESG impacts or issues that substantively influence the assessments and decisions of stakeholders.
Proportionality is tailoring ESG practices and disclosures to the size, complexity, and specific characteristics of an organisation.
To find out what the material issues are for your sector, you can look at the SASB (Sustainability Accounting Standards Board) Materiality Map and Standards. This helps companies identify the key issues that are most important for their industry. It provides straightforward guidelines on what to measure and report, so you can focus on what matters most.
Each year ESG_VC conducts in-depth research into the progression of ESG factors within the venture capital industry. The 2024 report includes data and research contributed by over 750 companies. Based on analysis of this data, and additional qualitative feedback, we have sketched out a roadmap of initiatives for companies to consider as they grow. Guidance on all aspects of this illustration are provided in the ESG_VC toolkit.