ESG for startups

//vol.13-2 Interview

How does ESG affect young entrepreneurs?

As the threat of climate change and the depletion of natural resources grow, so investors tend to factor sustainability in their investment choices so it is important for young entrepreneurs to know how ESG might affect them.

How would you define ESG?

Basically put, environmental, social, and governance standards (ESG) indicate how well a company or organization performs in terms of social responsibility, environmental protection and ethical and governance.

Are you truly describing your company or is it just greenwashing?

Environmental criteria consider how a company performs as a steward of nature. Social criteria examine how it manages relationships with employees, suppliers, customers and the communities where it operates. Governance deals with a company’s leadership, executive pay, audits, internal controls, and shareholder rights.

Underpinning these factors is corporate governance which looks into the roles and responsibilities of the management of a company through its board, shareholders and the various stakeholders in that company.

In which way is ESG part of a sustainable business model?

Companies today are expected to run successful businesses that make profits but stakeholders expect them to do so in an ethical and responsible way. For example, companies that mistreat their staff and contractors or carry out manufacturing practices that damage the environment not only run the risk of being penalized by the authorities but also of losing out to their competitors in terms of reputation and branding, which in turn affects market share.

Applying ESG to business practices and business models helps promote responsible business behaviour across the company so that staff, customers, suppliers and other stakeholders can see that the company is taking a clear position on how it conducts business and how leadership decisions are taken.

To incorporate ESG into a business model, you must declare your commitment through your mission and policies, set up clear guidelines and procedures for staff and others doing business with you and then “walk the talk” by making sure that your actions and decisions follow the principles of respecting society and the environment. This is not always easy as there are many grey areas where your business may be in doubt as whether to pursue a certain business interest or work with certain partners who do not apply ESG principles, and that will be the test of how committed your company really is.

A further requirement will be willingness to disclose your ESG performance during your normal reporting cycle. Have you done what you said you would do? Also, is your disclosure truly describing your company or is it just “greenwashing”? Are you reporting on things that are material to your business or just picking things that are peripheral?

Which standards would you advise young entrepreneurs to apply to their companies?

There are many relevant standards. They include those that tell you how to run your company sustainably, such as ISO 14001 and ISO 26000. At a global level the UN has established 17 Sustainable Development Goals with 169 targets. They are a good starting point for young entrepreneurs.

In general, I would say that entrepreneurs should align their ideas with something that respects nature and is sensitive to their immediate communities’ needs but also to those of wider society. As long as the values and purpose are right, the direction becomes clear and usually the standards are just a means of making sure that things are executed properly and that the appropriate policies and procedures are in place.

Does it make sense for investors to choose startups that put into practice the principle of doing well by doing good?

Generally, investors look for startups that have potential to succeed and be profitable but they are increasingly looking for long-term stability and steady growth as well as shortterm profitability. Investing in startups is risky so they look for signs that the company is well-run and demonstrates capable leadership and decision-making. Hence, visible ESG shows that the company takes its responsibilities seriously.

In addition, investors do not only take an initial look at companies. After starting up, they expect momentum in environmental and social performance to be maintained as well as sound governance structure. For startups, this can be tough but the good news is that investors want to be part of it, provided that you can prove your intention to do good and then deliver on your word.

What is the real difference between ESG and ethically sound traditional business practice?

I think that ethical business is more about codes of conduct and realizing the true moral values behind a business. In that sense, ethics is about what you should and should not do, not just relying on regulations to tell you what to do. For instance, minimum wages can be set by law but if you know that this is not a living wage for your staff, you should do the ethical thing and pay them accordingly. Likewise, if you market harmful products like tobacco and alcohol ask yourself if you should be selling them even if demand and profits are good?

The ultimate goal for any enterprise is to be profitable, but at what cost?

Identify your purpose. Ask yourself why you want to do what you do? Is it really to do good as well as making a profit?

ESG puts such ethical issues into some sort of context by providing criteria for standards of behaviour. Hence, ESG reporting is a key measure – you have to disclose what you do and be open and transparent. That is difficult for many companies if they don’t want to admit their failings. On the plus side, if you find yourself in this situation you can benchmark yourself against others to see how well you are doing.

ESG is still evolving and there is global recognition that it provides a way for companies to align interests if we are to tackle major issues like climate change and avoid or at least control other natural disasters like pandemics and food shortages.

Have ESG standards prevailed during the pandemic?

There should be no conflict as ESG promotes doing the “right thing.” Companies would tend to protect their staff before helping the wider community but corporate social responsibility also comes into play as a nudge factor.

How can environment-minded startups adjust when they see staff using disposable masks and ordering takeaway meals in polystyrene boxes?

They can encourage reusable masks and ask people to use their own food containers for takeaway food. Managers can be mindful of staff needs when suggesting that they work from home and make sure that they still feel connected by regular check-ins. Being sensitive about mental health, unemployment/loss of jobs and business recovery is also very important.

What is the most important advice you would offer to young startups who want their business to focus on consistently sustainable social impact?

First, identify your purpose. Ask yourself “Why do I want to do what I do? Is it really to do good as well as making a profit?” Think about it and test your ideas on others to see if it makes sense. Study the United Nations’ Sustainable Development Goals and other guidelines to see if your ideas concur with the principles.

Second, don’t do it alone. Find a mentor or coach who can steer you and help you come up with the right business model. There are a lot of mature people out there who have been successful in their own right and want to give back to society, not just in charity work but by helping young people become successful but ethical entrepreneurs.

The ultimate goal for any enterprise is to be profitable, but at what cost? We have to be sensitive about the planet’s scarce resources and the gaps between the world’s “haves” and “have nots”. Be smart and cnsistent. Make sure that you can measure your environmental impact, both negative and positive.

Dr Thomas Tang is a City University of Hong Kong Adjunct Professor in innovation, business ethics & sustainability and corporate strategy. He is also a Fellow of the Royal Society of Arts and a Fellow of the Institute of Environmental Management.