Startups must vet ESG to attract venture capital – Nick Freer

A study last month by a collective of leading European venture capital firms (VCs) found that while startups are doing okay on the S and the G components of ESG, they are way behind the curve when it comes to the E component, environmental.

Only 11 per cent of companies surveyed currently measure their carbon footprint, while an even lower percentage, 7 per cent, have a policy and programme in place to achieve net zero carbon. By way of comparison, the average performance of early-stage startups on environmental metrics is almost 50 per lower than social and governance metrics.

On the upside, the research found that venture-backed businesses adopt better ESG practices as they scale, with notable progress as they move through various funding rounds. In no small part, this is because environmental, social, and governance factors have become a key part of investment strategy for VCs.

As Andrew Noble, a partner with Edinburgh investment manager Par Equity, puts it: “We’ve always sought to help management teams build better companies, and ESG has become an increasingly important lever to achieve this. Our portfolio companies recognise this too and, over the last two years, they’ve been more engaged on ESG than ever before and at a much earlier stage. Having a robust approach to ESG is very much part of their value creation strategy.”

Noble adds: “Not only do we use it for an annual assessment of the portfolio, but it’s now part of our pre-investment diligence, setting a baseline ESG score and helping management teams drive the ESG agenda from day one.”

Karen McCormick, chair of ESG_VC, who carried out the survey, says: “Early-stage companies can feel overwhelmed by a plethora of frameworks, acronyms, platforms, and other solutions. Companies are, therefore, struggling to feel incentivised to invest the substantial time and resources in getting to grips with this complex topic – particularly when a startup’s environmental footprint may feel less impactful than say a global conglomerate.”

Catching up this week with Laura Westring, senior communications manager with highly-rated Scottish startup Amiqus, Westring said: “The market for carbon removal is still in its infancy and, for early stage businesses, calculating emissions can take several months, with most to be found within supply chains.”

“I don’t believe these businesses are ignoring the global call for carbon renewal”, Westring continues, “rather many are asking themselves what can feasibly be implemented for real impact, because it’s not as simple as planting a few trees. One thing is certain though, it’s easier to ask the hard questions about your supply chain while you scale than it is to re-strategise after.”

According to the poll, companies do much better when it comes to equality, diversity, and inclusion, and mental health. 31 per cent of companies surveyed already provide equality, diversity, and inclusion training staff, with 58 per cent of companies having a policy in place to provide support around mental health and wellbeing.

Nick Freer is the founding director of strategic communications agency the Freer Consultancy