The Importance of ESG for Tech Startups

The evolution of big data in the entrepreneurial and finance world has resulted in the rise of another massive trend and that is the demand for ESG. Standing for environmental, social, and governance factors, ESG has become an immensely important aspect of your business strategy.

The 2015 research study found a strong correlation between a business’ ESG performance and their stock price performance. The same was concluded by Harvard Business School. They emphasize that those businesses that have addressed those ESG problems related to their industry outperform their competitors.

Unfortunately, startups are still not aware of the rising benefits of ESG implementation. In fact, this is yet another paradox we’re facing. A great majority of tech startups are launched by Millennials, who strongly believe that companies need to have a greater purpose. Still, most of their companies are not socially responsible.

So, why exactly are ESG factors important to your tech startup? Let’s find out!

Attracting More Investors

If you’ve been wondering why investors avoid buying into tobacco, weapons, and gambling industries, the reason is simple. They have strict investment policies and are focused on those businesses contributing to the betterment of society. Parallel with your market benchmarks or financial performance, business sustainability and social governance have become major investment drivers.

There are three major groups of ESG factors investors are using when assessing your company’s future financial performance:

• corporate governance concerns- management structure, employee relations
• social concerns- such as human rights, animal welfare, consumer protection
• environmental impact- environmental impacts, sustainability

If not addressed properly, these factors can significantly impact the total value of your startup. According to the recent statistics, only 13% of investors would invest in a company that may cause resource insufficiency.

Building Trust

The abovementioned BCG study also concluded that socially responsible businesses are appreciated more than their rivals that don’t play by the ESG rules. Simply put, people put their trust in brands that are striving to make the world a better place.

The 2017 study by Cone Communications emphasizes that 86% of US consumers require businesses to act on social and environmental issues. Above all, 50% of their participants emphasized that they boycotted a company that supported issues opposed to their values.

Nielsen concludes the same. Their Global Corporate Sustainability Report highlights that 66% of consumers are eager to spend more on sustainable brands.

And, as 42% of your startup’s reputation is based on customer perceptions, you should mind what they think of your new business.

Driving Better Profits

Respecting ESG factors is directly related to boosting your tech startup’s bottom line. And, the comprehensive research conducted by the Boston Consulting Group backs me up on this. Namely, they analyzed over 300 companies across different niches, including tech businesses. They found that socially responsible companies are more likely to make bigger profits.

Sure, to get the most out of ESG implementation, you need to have a strong ESG reporting strategy in place. This means tracking key ESG key performance indicators, collecting your performance data regularly, processing this data, as well as conducting a detailed peer analysis. Knowing what the major pitfalls in your strategy are, you will be able to fix them painlessly and create impressive sustainability reports that will attract more investors and customers.

Helping You Hire and Retain Top Talent

The tech industry is expanding at an astonishing rate. With the rise of your competitors daily, it’s not surprising that attracting the right employees and retaining them has never been more difficult, especially for startups.

Precisely because of that, you need to adapt your corporate culture to your employees’ expectations. In addition to some fundamental factors, such as proper compensation, respectful treatment, and job security, Millennials also look at the big picture. They’re looking for meaningful jobs, ones that contribute to society. And, by implementing the basic principles of ESG, you will create a value-oriented corporate culture that will not only attract top talent, but also help you retain them.

Industry Giants Care about Sustainability

Any tech startup’s dream is to work with tech giants one day. And, that’s totally fine.

However, to get them to notice you, you first need to prove you’re valuable and relevant enough.

For example, a few decades, only a handful of corporate giants required their suppliers to work according to ESG. However, the rules of the game have changed and, today, many tech conglomerates including Microsoft and Samsung are members of the famous Dow Jones Sustainability Index.

So, if you want to work with the big tech industry players, you definitely need to build your corporate responsibility standards around the ESG factors and stick to them.

ESG is the Future of Tech Startups, so Don’t Ignore It

Startups have a great opportunity to implement ESG right from the start. Remember, this is something both your investors, consumers, and suppliers expect of you. It’s important to understand that building an environmentally or socially responsible company is not about making money or growing your business faster. It’s about your vision. And, selling that vision to the right people will boost your credibility in the tech industry and drive profits.

Just like Larry Fink puts it nicely: “To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society.”