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Over the last 20 years, there has been a massive cultural shift in the business world. The elements that have always been considered essential for business success (e.g., a strong value proposition, product–market fit and sound financial planning) remain relevant, but they are no longer enough. There is a new necessary component today: an appropriate environmental, social and governance (ESG) strategy.
The pressure for companies to measure up on ESG comes from all fronts — regulatory bodies, customers, investors and even their own employees. In its early days, a business may still be able to prosper without devoting too much thought to ESG, but as it grows larger and time goes on, this becomes much less likely.
Enterprises that disregard ESG will find it more challenging to raise investment capital and to nurture a positive public image, particularly when compared to competitors that can point to a solid ESG track record.
Start with self-assessment
An effective ESG strategy must begin with an honest self-assessment. Since there is no single, all-encompassing metric of ESG performance, companies should ensure that they focus their resources on what matters most and not try to track as many relevant metrics as possible.
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These include areas like the company’s carbon footprint, its gender pay gap, the diversity of its boardroom, its compliance with national and supranational (for example, EU) regulatory frameworks, the strength of its cybersecurity infrastructure and the labor practices of companies in its supply chain.
Once reliable measures have been taken, the results should be compared to expected baselines in order to evaluate where the business is weakest. Companies should not rush to take sweeping actions before they have completed this assessment. Overall, ESG strategies should not be thought of as quick, one-time fixes or box-ticking exercises, but rather as long-term processes requiring continuous refinement, monitoring and effort.
Taking an accurate and thorough measure of where a company currently stands does not fix all of its shortcomings, but it is an excellent first step. Beginning by pinpointing deficiencies allows a company’s ESG efforts to be as impactful as possible going forwards.
How ESG concerns change as companies grow
Some elements that could come under the ESG umbrella are relevant, independent of the size of the company. All companies, for example, should abide by the employment laws wherever they operate. They should provide reasonable written contracts (including an IP clause) to all employees, have equal pay for equal work and not pay less than the minimum wage, and have at least a basic health and safety policy in place.
By the time a company grows to have, say, 50 employees, it should also have a handbook for all new hires, with clear directions for what conduct is expected of them, the procedures that they should follow if they are experiencing difficulties, and so on. Health and safety requirements also become more stringent as companies grow.
Once a company has grown even further, having upwards of 200 employees, it becomes more important to think about hiring a dedicated ESG professional to ensure that it is reaching its goals. Having someone whose role is focused on ESG can free up a lot of time for everyone else at the company since the expert can let each division define how best to use the time they spend on ESG and greatly streamline the process of ESG compliance.
Emissions and supply chains
One consideration to bear in mind is that as companies expand, their supply chains and emissions grow exponentially. Since the footprint and practices of all suppliers factor into a company’s ESG metrics, it is very important to select business partners carefully. It is not sufficient to just ask potential suppliers about whether they meet certain standards and take their word for it.
It is every company’s responsibility to independently verify that suppliers are sticking to ethical and legal principles. As well as environmental friendliness standards (like not causing reckless damage to fragile ecosystems or polluting), this would include making sure that they do not employ child labor or engage in other exploitative practices. Habits that cause small increases in emissions when a company is small are magnified as it grows, leading to ballooning emissions over time. This is another reason why, as mentioned, it is a good idea for companies to take ESG seriously before they “have to.”
For example, a young company with just a few employees should still establish a norm whereby data is only transferred when absolutely necessary. This may only make a marginal absolute difference to the company’s environmental impact at first, but will have a noticeable impact if this norm is maintained as the company grows, say, to 50 times the number of employees. It’s far easier to maintain standard working practices than it is to change the culture of a multinational organization.
The future of ESG
ESG is here to stay. Far from being a passing fad, environmental and ethical concerns are only becoming more of a priority as the 21st century continues. This is true in a broad sense culturally, in terms of legal regulations, and when it comes to investors’ decisions.
As time goes by, there will be increasing cooperation between various groups of investors, decision-makers and leading business figures — especially given pressure from investors and Limited Partners (LPs). This will enable moves towards common, standardized frameworks for ESG, with clear guidelines as to which metrics should be assessed, and expected baselines for these measurements. Companies will therefore find it much easier to self-assess and locate their deficits.
Measurements will also become more easily available in areas where they are not currently. For example, as things stand today, it’s difficult for a company to put an accurate number to its greenhouse gas emissions. In the future, companies will have more accurate numbers and accessible measurements to calculate whether specific ESG-related actions have the desired effect, and it’s only going to grow from there.
That’s why it makes sense for startups to create a baseline ESG strategy today instead of playing catch-up with their competitors in years to come.
Patrik Backman is General Partner at OpenOcean.
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