How startups are looking to create long-term value by integrating ESG

As environmental, social, and (corporate) governance (ESG) efforts, laws, and regulations gain traction, new-age startup CFOs are considering going on the ESG journey and are asking various questions, such as; if now is the best time to invest in ESG. What are the risks associated with it for startups? Should ESG be included in a formal corporate strategy?

ESG, in the past few years, has become the prime focus area for many mature companies. According to an EY survey, about 35% of CFOs think the growing importance of ESG issues and sustainability has increased attention on managing for the long term. ETCFO spoke to a few startup CFOs on how they are treading the ESG path.

Also read: CFOs struggle to balance short-term and long-term priorities, says EY Report

Chirag Mavani, CFO, The Souled Store, who calls ESG a means to be self-disciplined, says, “ESG is gaining significant traction amongst the investor community. Also, with India being at the helm of things at G20 and the theme of India's G20 Presidency being ‘Vasudhaiva Kutumbakam’ or ‘One Earth. One Family. One Future’, it is quite clear that the message is coming from the top leadership.”

Samadrita Chakravarty, Group CFO, of the B2B startup, ReshaMandi, said it is equally important to look at the benefit that the company would get with the implementation of the ESG framework in the long run. “The operation cost of the company will be reduced by a decrease in carbon footprint, promotion of energy efficiency, and reduction of waste generation. Investors can value a company more if it has implemented an ESG framework as it would result in the long-term sustainability of the company with a better financial performance. It helps to increase the brand image, lessen the legal, regulatory, and reputational risks and make the company socially beneficial to the outside world thus making it lucrative for the investors to invest.”


ESG versus CSR, What is the difference?

Jaipal Singal, CFO, iD Fresh Foods, a Bangalore-based food product startup, while accentuating the difference between ESG and Corporate Social Responsibility (CSR) initiatives states, “ESG deals with environmental impact, social performance, and corporate governance. It focuses on the impact of a corporate group’s or an enterprise’s operations on the environment, society, and internal governance. Meanwhile, CSR is those initiatives taken up by a business house to discharge its social and environmental responsibilities. It includes philanthropy, sustainability initiatives, and welfare programmes among others.”

Broadly, ESG allows for the measurement of a company's numerous CSR efforts. Moreover, it also improves business accountability to social, environmental, and corporate governance through measurable targets.

Chakravarty, on the other hand, defines CSR as a more “qualitative internal framework” and ESG as “quantifiable” in nature. She says, “CSR and ESG are different frameworks that companies use to assess sustainability. CSR may be used as an internal framework and is more qualitative which generally shows the goals, values and culture of an organization towards social responsibility. ESG is quantifiable which provides a measure of sustainability through a set of standards that companies and investors use to evaluate the sustainability and ethical impact of investments.”

She says, “CSR focuses on corporate volunteering, lowering carbon footprint, and engaging with charities whereas ESG considers environmental, social, and governance factors which helps to increase the sustainability of the company thereby increasing valuation of the company in the long run.”

According to Chakravarty, ESG highlights the ethics of the business model. “It (ESG) shows whether the company has a long-term vision or not. If the company has a long-term vision, then the company is definitely a sustainable one and also it is safe for the investors to invest in that company,” she adds.


Long-term value creation

Evidently, ESG factors have increasingly become crucial considerations for investors and financial institutions. Therefore, enterprises are actively integrating ESG criteria into their investment-making decisions, recognising that sustainable and responsible companies tend to deliver better financial performance in the long run.

However, for some startups, making the decision to integrate these (ESG) frameworks into their business isn't always simple. According to Chakravarty, the ESG Framework can't merely be thrown into the system. To address issues like social inequality and climate change, you also need capital, “You need capital, you need individuals who understand this, and by people I mean experts.”

Most glam companies are now depending upon the consultants implementing ESG and it's a bit expensive also, not all companies can do it, thing is that everyone wants their valuation of the company to go up but we need to take a call at some point in time, whether this is the right time to invest in ESG or not?Samadrita Chakravarty, CFO, ReshaMandi

ESG goals

While on the other hand, some startups have constituted ‘ESG Goals’ right from the beginning. Singal shares, “We voluntarily would like to prioritise the ESG goals and always be compliant. Of course, the initial cost may go up, but, you know, it always pays you back in the long term.”

In terms of ESG integration in the organisation, he mentioned, “At iD, we have devised a detailed strategy for achieving our ESG objectives. As a company, we have carved out both short-term and long-term sustainability goals to achieve the same. Aspects like cost reduction & efficiency, responsible sourcing, and care for the environment among others are our immediate focus areas and fall under our short-term ESG goals. Similarly, the creation of sustainable products, risk mitigation, innovation, and related themes are our long-term ESG goals, which also constitute the core values of iD as a group.

“As far as our focus on the ESG is concerned, we constantly endeavour to use sustainable means and processes. We have adopted a zero plastic policy while executing our orders and also contemplate manufacturing apparel out of recycled plastic bottles. Similarly, on the social front, we actively participate in sponsoring programs which empower the deserving students to education, shelter for the poor, etc.,” shares Mavani on integrating ESG criteria in the organisation.

On the rising cost of compliance, he says, “Currently, we do not see any cost implications towards ESG. We firmly believe in laying down a roadmap to follow the ESG path.”


Green jobs

Most startups lack the internal expertise needed to successfully execute ESG initiatives because the subject is still relatively new. They (startups) instead rely on outside consultants because it is easier to obtain reliable guidance at an expense. There are numerous certification courses/programs available to help people become trained in ESG capabilities. After the Securities Exchange Board of India (SEBI) established the regulatory framework for ESG reporting for listed businesses, there has been an increase in demand for such talents in India for jobs in the business sector.

Chakravarty claims outsourcing the “integration of sustainability initiatives” is a more reliable option, especially for companies where CSR contribution is mandatory, “up to 2% of your previous three years’ average.” Even for companies which are not mandatorily required to go do CSR funding but still are doing it.

She explains, “These jobs are popularly known as ‘green jobs', the jobs that produce goods or services benefiting the environment or conserve natural resources. The professionals are taking this certificate course to get recognised and hired by companies. Institutions are tying up with companies for job placements for such certified professionals.” The demand for ESG-certified professionals is increasing in India as the country faces significant environmental and social challenges.


Conclusion

ESG reporting and disclosure is an ever-changing field. For many businesses, the real benefits of implementing a comprehensive ESG strategy should eventually outweigh the potential risks. Early-adopting startups will have an advantage over their competitors in terms of business and collaboration opportunities. They will be able to reduce the risk of losing the business by becoming robust and sustainable. Promoters of startups, CFOs, and board members may be encouraged to implement a standard ESG plan as soon as possible in order to win over and maintain the faith and confidence of customers, investors, and partners.