How Indian Startups Can Develop An ESG Integrated Business Strategy

As environmental, social, and governance (ESG) practices, policies, and regulations evolve, new-age startup executives are considering embarking on the journey and asking several critical questions. 

Why move to ESG reporting and sustainability initiatives? Should there be a formal corporate strategy? What are the associated risks and rewards for startups? Is now the right time?

Over the past few years, ESG strategy has developed into a crucial area of attention for “big” businesses in several sectors throughout the world. Some startups may be attracted to it as a top business priority since their business models are already centred on social and environmental advancement. 

Yet, despite its growing importance, only a few startups have established an ESG working team or have taken steps to drive their strategic focus on ESG issues. 

With an increasingly demanding stakeholder base and an awareness of long-term benefits, startups should begin demonstrating their commitment to making an environmental and social impact by incorporating ESG into their corporate business strategy.  

Moreover, the ongoing expansion of ESG awareness, guidelines, procedures and changing regulations have created compelling options for startups to be early movers in this fast-pacing area. 

In India, SEBI’s new regulation requiring the top 1000 companies to publish BRSR beginning in fiscal year 22-23 is already heavily pushing the corporate ecosystem toward the ESG movement. These public companies place a high priority on their entire value chain in order to comply with the policies outlined in the nine NGRBC principles. 

In order to align with efforts to reduce global climate risk, the RBI has also urged banks to promote sustainable financial management and integrate ESG standards throughout their lending portfolio.

Top public companies, that have already begun their journey, will push their vendors, suppliers, and value chain partners to adopt these policies and procedures. Startups that are part of these value chains will start looking at those aspects. 

ESG Adoption: Is There Any Other Compelling Pull For Startups?

Apart from the industry push, startups have several compelling reasons to invest in a standard ESG strategy integrated into the corporate-level business strategy. For example, investors’ demand for trusted non-financial performance disclosures, rising consumer, employee, and other stakeholder expectations for ESG accountability, long-term strategic organisational benefits, improved brand value and reputation, and overall business stability.    

Investors are increasingly committed to responsible investments and have begun investing in ESG funds or incorporating ESG factors in their investment decisions. Investors increasingly demand that concerns such as diversity and inclusion, human rights, climate change, business ethics and corporate governance be factored into their portfolios. 

ESG funds are expected to (at least theoretically at the moment) beat the market, considering that they consist of the best-performing companies on parameters that are increasingly becoming critical.

There are rising stakeholders’ expectations for ESG accountability. ESG stakeholder activism is transforming corporate governance where it is less dictated by the board of directors and more by a range of stakeholders from varying backgrounds with broader interests and goals. 

Stakeholders are using social media to voice their concerns and hold executives accountable for their actions, commitments, and positions they take or do not take. The issues raised on social media often function as coverage drivers in traditional media. An increasing number of media outlets report on controversies embarked on Twitter, Facebook or Instagram, so a discussion on social media quickly turns into a debate on traditional media. 

In startups, general counsels are stepping further out of a behind-the-scenes role of providing legal guidance and support to boards and management and more into the fray of supporting relations with boards and shareholders, authorities, partners, and public groups. 

Consumers, too, have started exhibiting strong support for environmental and social issues that underpin organisations’ purpose-driven business models. Employees are making their ESG preferences felt by choosing to work with firms whose values align with their own. 

To a large extent, the demographics of the stakeholders are tremendously shaping the ESG landscape across all sectors. Gen Z and millennials have a solid and assertive preference for rationing their money, time and skills to organisations committed to safeguarding the environment and fostering social equity. 

Large organisations are pushing their partners in their value chain to adapt to best ESG practices and comply with the policies and standards they must follow, making it imperative for startups to take these matters seriously. 

Can ESG Accountability Affect Financial Performance?

According to research from the NYU Stern Center for Sustainable Investment, a company’s financial performance is positively correlated with its ESG performance. Interestingly, 58% of corporate studies found improvements in metrics such as return on equity (ROE) and return on assets (ROA) resulting from better ESG performance. 

Companies with robust transparency and accountability records on their non-financial performance and proven steps towards ESG transformation have produced tangible financial benefits. 

ESG adoption directly affects the ability of the organisation to access markets, financial capital, and human resources and build better relationships with external stakeholders. Early movers companies are well-positioned to capitalise on the benefits of investing in a formal ESG strategy and present value to their stakeholders ahead of their peers. 

These early adopters will undoubtedly enjoy a host of competitive advantages for their foresight and proactiveness, like improved valuation and better stock performance. Trends have shown that the companies that exhibit strong ESG performance are becoming more resilient, better managed, and delivering better financial performance.

ESG-related drivers of financial performance are the focus on essential material issues, innovation, higher operational efficiency, and better risk management. Disclosure without strategy is ineffective. An ESG disclosure programme needs an accompanying organisational ESG strategy to drive better financial performance.

ESG Adoption: Risk Vs Reward 

Startups encounter obstacles in implementing an integrated corporate-level ESG strategy because of the lack of visibility of the required cost and time investment. For a young company, the expense of putting together the workforce, controls, KPIs, materiality analyses, reporting, and assurance required for a formal, complete ESG programme could seem exorbitant. 

However, it may be less expensive to create a new framework and hire more people now than later when procedures are more rigorous, and there may be more competition for available ESG-trained workers.

Startups may also get sceptical about the value of an ESG programme for their company. The executives may believe they don’t need to formally adopt an ESG strategy because it is already in the companies’ DNA by virtue of their green, sustainable, or social equity-focused business models. 

However, with rising concerns around greenwashing, just having an ESG-focused business model may no longer be enough to demonstrate ESG leadership or accountability. It is very likely that stakeholders will increasingly expect evidence that the ESG goals incorporated in a business model are being achieved. Disclosures associated with a formal strategy can be an effective mechanism for delivering this information to stakeholders. 

Companies also need clarification about overlapping ESG standards and frameworks in disclosure and reporting. However, with increased awareness and regulatory developments across the globe, the reporting and disclosure of material aspects are becoming clearer from each sector and industry perspective. 

Suggested Roadmap For Startups 

The case for implementing a holistic ESG strategy integrated at the corporate level continues to strengthen over time while the process for doing so becomes less complex.

The following steps comprise the transformation roadmap for implementing a formal ESG corporate-level strategy.

The first step in the roadmap entails defining the corporate purpose and assessing materiality while understanding key data sources, systems, and owners responsible for topics of material impact. ESG metrics may also be a significant consideration in the process of determining data sources and systems. With a focus on innovation, environmental, and social goals, startups may have unique metrics that are relevant to their stakeholders. 

Understanding ESG risks and opportunities by understanding material topics and priority areas via stakeholder engagement and peer analysis is the key to building a robust strategy. 

As a next step, companies can start taking initiatives to integrate ESG as an essential part of corporate strategy, establishing a robust corporate governance structure, developing a roadmap for ESG initiatives and setting clear ownership.   

Finally, companies must integrate ESG into their enterprise risk management system during the implementation stage by elevating and refining operations, processes, data, and controls. This is followed by the transformation stage, where startups can focus on designing and providing improved ESG-enabled products and experiences, measure their impact and improve their performances and tell success stories in the form of reports and other communication forms to the stakeholders.  

Startups can begin their journey by following the three steps listed below:

Step 1: Sesitising & Capacity Building At CXO & Board level

Top executives can begin to understand the core ESG concepts, various standards and frameworks, current industry trends, and updates to gain insights into how developments in the ecosystem will impact their business models. 

Step 2: Set Up An ESG Governance Structure

Companies can use a values-driven strategy to develop an ESG governance framework and discover how to be financially successful while also contributing to the solutions to some of the most severe global issues in order to identify strategic opportunities and achieve corporate goals. 

These initiatives should be supervised at the board and senior management levels as the foundation of an effective governance system.

Step 3: Create The Core ESG Implementation Team (ESG Task Force) & Departmental POCs

The cross-functional ESG core team should concentrate on establishing enterprise-wide priorities as well as coordinating and amplifying the work being done by various factions within the organisation.

Conclusion

ESG reporting, governance, and disclosure is a rapidly evolving field. The real benefits of implementing a formal, comprehensive strategy should eventually outweigh the perceived concerns for many organisations.  

Early mover startups will be better placed than their counterparts to get more business and partnership opportunities. They will be able to mitigate the risk of losing the business by becoming resilient and sustainable. 

Startup promoters, CXOs and board directors may be persuaded to proceed with a standard ESG plan sooner rather than later to increase and preserve the trust and confidence of clients, investors, and partners.