ESG Gains Momentum Among Early-Stage Startups

500 Startups is a global venture capital firm with a network of startup programs headquartered in Silicon Valley. The firm has invested in over 2,300 companies via its five global funds and 15 thematic funds dedicated to specific geographic markets and verticals. Its 100+ team members are located in 20 countries around the world in order to support the 500 Startups global portfolio of investments which spans more than 75 countries.

Environmental, Social, and Governance (ESG) refers to the three key factors in measuring the sustainability and societal impact of an investment. ESG criteria help to better determine the future financial performance of companies, both in terms of return and risk. While some early-stage companies might feel that investors do not care about ESG policies or that they are too early to implement them, The Black Lives Matter movement and the spread of COVID-19 are highlighting the importance of outlining internal policies early and the long term impact of a company’s actions as it scales. 

Both startup founders and investors have an important role to play in building a more inclusive, sustainable, and equitable economy. Working together to incorporate ESG policies at the early stage makes good business sense for several reasons, including a greater opportunity to acquire new customers who value sustainability, diversity, and fair labor practices, and to attract and retain talent. But are early-stage startups embracing ESG? How do founders view ESG in light of recent events?

The current state of ESG among early-stage startups

500 Startups, a leading global venture fund and seed accelerator, surveyed its founder community to get a sense of how current events are influencing inclusive, sustainable, and equitable business practices at startups. One hundred nine startup founders responded to questions about internal environmental, social, and governance (ESG) views and practices. The majority of respondents (57%) were pre-seed startups with fewer than five employees. 

According to the survey results, 66% of founders revealed that recent events (namely the Black Lives Matter movement) made them want to implement policies, practices, and metrics involving ESG issues such as diversity and inclusion. 90% responded that they think implementing ESG policies and practices is important due to COVID-19 (53% think it is extremely important and 37% think it is somewhat important). Furthermore, 69% responded that they think ESG will increase sales, and an overwhelming majority (91%) responded that ESG will help their company attract and retain talent.

Among startup founders who do not yet have ESG policies in place, 37% responded that they were too early, and 20% responded that investors don’t care about them. However, an overwhelming majority (90%) of all founders surveyed stated that if an investor required a company to implement ESG, it would make the investor desirable (45% extremely desirable, 24% very desirable, and 21% somewhat desirable). 

Laying the foundation for long-term value, growth, and returns

ESG risks can vary greatly depending on the company, product, service, or market. However, early-stage investors can play an active role in educating startups about the risks. After all, strong ESG policies correlate with higher returns. According to a Boston Consulting Group report, diverse teams perform better in the long-term, both in terms of innovation and improved financial performance. Consumers increasingly show their support for companies with ethical and transparent business practices, including those with a positive environmental impact and sustainable operations. Meanwhile, governance and regulatory issues, such as compliance with data privacy laws, can affect companies of any size, which means that even at the early stage, awareness of regulations is crucial. Outlining policies related to these issues can help future-proof smaller companies and put them in a better position to face potential regulatory changes over time. 

For more details on how founders view ESG in the current climate, and whether or not recent events influenced the integration of ESG, view the full survey results. Additional resources on how to start implementing ESG practices are available here

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.