Startups that adopt ESG principles early gain a competitive edge. Why? ESG (Environmental, Social, and Governance) practices attract investors, lower risks, and align businesses with consumer and employee expectations. With 72% of investors evaluating ESG performance and 83% of consumers expecting businesses to lead on ESG, the demand is clear.
Key Takeaways:
- What is ESG? Focuses on environmental impact (e.g., emissions), social responsibility (e.g., employee well-being), and governance (e.g., ethical leadership).
- Why start early? Embedding ESG early avoids costly retrofits and attracts funding from the projected $53 trillion ESG investment pool by 2025.
- Benefits: Easier access to capital, stronger reputation, risk reduction, and talent attraction.
- How to start: Conduct a materiality assessment, set measurable goals, build an ESG team, and integrate practices into daily operations.
- Investor expectations: Transparent, measurable ESG data tied to financial performance is critical.
This guide explains how startups can implement ESG effectively, meet investor demands, and build sustainable businesses. Ready to take the first step? Let’s dive in.
How to Build an Effective ESG Plan For Your Company
Investor and Regulatory Expectations
Investors and regulators are putting more pressure on companies to adopt clear and effective ESG (Environmental, Social, and Governance) practices. For startups, this means ESG policies are no longer optional if they want to secure funding and remain competitive. In the U.S., the focus on ESG has grown significantly, with investors closely examining how startups address these issues during due diligence and investment reviews. Aligning with these expectations is crucial for long-term success.
What Investors Expect from ESG Practices
Investors increasingly rely on ESG policies to evaluate a startup’s vision, strategy, and risk management. They want to see how companies handle their impact on stakeholders and the environment. Between 2017 and 2019, the number of institutional and retail investors incorporating ESG principles into at least a quarter of their portfolios jumped from 48% to 75%.
Transparency is a top priority. Investors demand clear, audited ESG data and expect companies to openly communicate their environmental and social impacts throughout the year. However, trust remains a challenge – 94% of investors believe corporate ESG reports often include unsupported claims. This is why 85% of investors think ESG metrics and KPIs should be audited with the same rigor as financial statements.
Investors also want measurable ESG results that tie directly to financial performance. Startups that focus on ESG factors with tangible financial impact have a better chance of attracting investment.
"We believe a company’s ESG score will soon effectively be as important as its credit rating."
- Cyrus Taraporevala, CEO of State Street Global Advisors
The financial stakes are enormous. By 2018, sustainable investing assets reached $14.1 trillion in Europe and $12 trillion in the U.S.. Experts predict that by 2025, ESG-related assets in the U.S. could soar to $35 trillion. These trends underscore the importance of meeting investor demands while navigating the complex regulatory environment.
The US Regulatory Landscape
In the U.S., ESG regulations are fragmented, creating challenges for startups. Unlike the European Union’s unified approach, the U.S. regulatory framework varies widely across states and municipalities, with both pro- and anti-ESG policies shaping the landscape.
At the federal level, the SEC is working on climate reporting standards, but the lack of comprehensive regulations has allowed states like California to take the lead. For instance, California’s SB 261 and SB 253 are setting ESG reporting benchmarks that could influence national standards.
Compliance can be a significant burden. By 2025, 40% of U.S. companies identified ESG compliance as a major challenge affecting global trade operations. Industries like finance, insurance (46%), and technology (47%) reported ESG compliance as one of their top operational hurdles. While smaller companies are often more focused on growth, ignoring ESG compliance entirely could expose startups to legal and reputational risks.
Monitoring regulatory changes is essential to avoid potential sustainability-related litigation. Startups need to stay ahead of evolving standards to protect their future.
Preparing for Future ESG Challenges
Startups that plan for future ESG demands can gain a competitive edge. In 2024, 71% of corporate leaders viewed ESG investment as a strategic advantage, up from 60% the previous year. This highlights the growing importance of integrating ESG into overall business planning.
To prepare, startups should conduct materiality assessments to identify the ESG factors most relevant to their operations. Early adoption of ESG practices can lead to better risk management, increased efficiency, and stronger market positioning. A strategic approach involves embedding ESG considerations into enterprise risk management frameworks and investing in robust ESG data systems to meet reporting and stakeholder expectations.
Practical steps include leveraging internal expertise, finding cost-effective external resources, and aligning ESG efforts with compliance requirements. Startups should also anticipate how ESG expectations will evolve, particularly if they aim to attract private capital or go public.
Adopting frameworks tailored to specific issues and regional requirements is another key step. Appointing a chief sustainability officer and maintaining an up-to-date compliance roadmap can further solidify ESG initiatives.
The demand for sustainable investments is massive. Nearly 90% of investors globally are interested in sustainable investing, with Gen Z (99%) and Millennials (97%) leading the charge. Yet, 30% of investors admit they struggle to find appealing ESG opportunities. This creates a prime opportunity for startups that are well-prepared to meet these expectations.
Identifying and Prioritizing ESG Factors
When it comes to ESG (Environmental, Social, and Governance) factors, the first step is to figure out which ones matter most to your startup. Not all ESG issues will be relevant to your business, so it’s crucial to focus on those that align with your specific industry, business model, and stakeholders. This process, often referred to as a materiality assessment, helps you allocate resources effectively, ensuring you’re addressing the ESG factors that can have the biggest impact on your company’s success and relationships.
Finding Your Material ESG Factors
Material ESG factors are those that significantly influence your operations, financial performance, or relationships with stakeholders. If you’re running an early-stage startup, you might find that traditional ESG frameworks don’t fully address the unique challenges you face.
"Currently, few adequate tools are available for venture capital; while the PRI and SASB have come out with great tools for asset managers and buyout firms, they don’t quite cover where VC is: rapidly evolving startups. We are at the very beginning of the VC ESG journey and need to be diligent right now to create long-term and multi-stakeholder value." – Prof. Johannes Lenhard, Cambridge University
While tools may be limited, startups can still make use of resources like the SASB Materiality Finder. This tool organizes sustainability topics into five key dimensions and provides insights tailored to different industries. For instance, if you’re in fintech, you might focus on data security, financial inclusion, and algorithmic bias. On the other hand, a food delivery startup might prioritize issues like packaging waste, driver working conditions, and emissions from transportation.
To identify what’s material for your business, start by understanding the interests of your stakeholders. Stakeholders can include investors, employees, customers, partners, and local communities, each bringing their own expectations. For example, employees might care about workplace diversity and mental health initiatives, while customers might focus on ethical sourcing and environmental practices.
Risk and reputation also play a big role in prioritizing ESG factors. Think about the environmental or social risks that could hurt your financial performance or brand. For example, a software startup might focus on data privacy and cybersecurity, while a manufacturing startup would likely emphasize worker safety and compliance with environmental regulations.
It’s also important to factor in compliance. By integrating ESG into your existing compliance processes, you can build a more cost-effective and comprehensive ESG program. This ensures you meet regulatory requirements while setting the stage for future ESG reporting.
Working with Stakeholders on ESG Priorities
Once you’ve identified your material ESG factors, the next step is to involve your stakeholders in refining and validating these priorities. Stakeholder engagement isn’t just about identifying who is affected by your business – it’s about actively including them in the process. This helps you better understand their expectations and gain their support.
Your stakeholders generally fall into two groups: internal (employees, management, shareholders) and external (customers, suppliers, regulatory bodies, NGOs, and local communities). Engaging with them early through surveys, interviews, focus groups, or public forums can provide valuable insights into how to set and implement ESG priorities.
Building trust with stakeholders requires more than just gathering input – it’s about showing that you’re listening. Share updates on how their feedback has shaped your ESG plans. This kind of transparency fosters trust and strengthens relationships.
You can also formalize your ESG commitments by including them in contracts with suppliers or employee agreements. This ensures that your ESG priorities extend beyond your immediate operations and are embedded throughout your supply chain and workforce.
Transparency is key throughout this process. Be open about your ESG goals and challenges, even if your efforts are still a work in progress. Honest communication builds accountability and trust with your stakeholders.
Collaborating with industry peers can also amplify your efforts. By connecting with like-minded organizations, you can broaden the impact of your ESG initiatives and gain additional support.
As your startup grows, both stakeholder expectations and material ESG factors will evolve. Regularly reassess your priorities to ensure they remain relevant. Open communication, collaboration, and accountability are essential for maintaining stakeholder support and strengthening your ESG practices over time. By incorporating stakeholder insights, you can create a more sustainable and impactful ESG strategy across your operations.
Implementing ESG in Daily Operations
Take your ESG priorities and put them into action by developing a clear plan, assembling a capable team, and weaving ESG practices into your everyday operations.
Creating Your ESG Roadmap
A solid ESG roadmap turns good intentions into measurable outcomes. Start small – focus on 2–3 straightforward goals to keep your team from feeling overwhelmed. Take a close look at your current business practices to spot areas where ESG efforts can make an impact. For instance, if you’re already tracking employee satisfaction, consider adding metrics like diversity or mental health to the mix.
Set goals with a clear timeline: short-, medium-, and long-term. A short-term goal might be launching a recycling initiative or drafting a supplier code of conduct. Medium-term goals could include cutting energy use by 20% or achieving gender balance in leadership roles. Long-term objectives might aim for carbon neutrality or earning a B-Corp certification.
Choose a framework that complements your business goals and adapt it to fit your needs. Many startups find it helpful to begin with something manageable, like the UN Sustainable Development Goals, and then scale up to more complex frameworks as they gain experience. For example, a company targeting a 30% reduction in greenhouse gas emissions within three years might use the CSRD or EU Taxonomy to identify actionable steps and streamline their efforts. Be specific – set measurable targets, such as increasing the percentage of women in technical roles from 25% to 40% by December 2026.
Once your roadmap is in place, the next step is to build a team to bring it to life.
Setting Up ESG Team Structure
Form a cross-functional ESG team made up of strong communicators who can drive initiatives forward without immediately relying on external consultants. Assign clear responsibilities and ensure the team has the resources it needs to succeed.
As your company grows, it may make sense to appoint someone specifically responsible for ESG initiatives. For businesses with over 250 employees, hiring a dedicated ESG professional is often the next logical step. A great example is Truecaller, the caller ID app that went public in 2021 with a market cap of $2.2 billion. Truecaller made ESG a core part of its strategy, committing to "make the communication of the future smarter, safer, and more efficient".
Incorporating ESG into board meetings is another critical move. This keeps leadership engaged and ensures regular opportunities to review progress. Simple actions like investing in collaboration tools and making ESG training accessible to employees can also go a long way in supporting your initiatives.
An organized team ensures that your roadmap translates into consistent, actionable practices.
Daily ESG Practices and Processes
With a roadmap and team in place, the next step is embedding ESG into your daily operations. The real proof of your ESG commitment lies in integrating it into everyday workflows. Instead of starting from scratch, look for ways to enhance existing processes in areas like procurement, risk management, and diversity initiatives.
Start with a gap analysis to identify where your current practices fall short compared to industry standards. Use this analysis to create tailored policies that align with your ESG goals. Engage with internal stakeholders to ensure these policies are practical and measurable. Define clear objectives, performance metrics, timelines, and accountability measures.
Focus on initiatives that offer the best return on investment. Consider exploring green funding options to balance impact with costs. Keep leadership and employees engaged through workshops and clear communication. Tools like AI-driven analytics and digital platforms can help you track progress and fine-tune your efforts by improving data accuracy and simplifying reporting.
As your business evolves, keep ESG integration at the forefront. According to Bain & Company:
"Integrating ESG into core business processes leads to higher employee engagement and improved operational efficiency".
Additionally, McKinsey highlights:
"more than 90 percent of S&P 500 companies now publish ESG reports in some form, as do approximately 70 percent of Russell 1000 companies".
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Measuring and Reporting ESG Progress
Once ESG practices are woven into your daily operations, the next step is to measure, report, and share your progress. Tracking and communicating results not only highlights your efforts but also identifies areas where you can improve. Transparent reporting builds trust and reinforces your commitment to sustainability.
ESG Performance Metrics and KPIs
The key to effective ESG tracking lies in choosing metrics that align with your goals and address stakeholder priorities. ESG metrics, often nonfinancial, measure how companies operate sustainably and responsibly. A mix of quantitative and qualitative indicators ensures a full picture of your impact.
Start by identifying the ESG issues most relevant to your industry. For instance, a fintech company might focus on financial inclusion and ethical investing, while a manufacturing firm may prioritize reducing emissions and managing waste. Avoid trying to track every possible metric – focus on those that genuinely reflect your impact.
Environmental metrics often include greenhouse gas emissions, energy usage, water consumption, and waste management. For example, if your company operates from a single office, you might monitor electricity usage (in kilowatt-hours) and set a goal to reduce it over the next year through energy-efficient equipment and behavioral changes.
Social metrics cover areas like labor practices, diversity, equity, and inclusion (DEI), supply chain sustainability, and community involvement. You could track the percentage of women and underrepresented groups in leadership roles, employee satisfaction scores, or even volunteer hours. These metrics matter – 41% of workers consider their company’s ESG initiatives important, with the figure rising to 46% for Gen Z and 55% for millennials.
Governance metrics focus on board diversity, executive compensation, ethics, and compliance. Even startups can track indicators such as the percentage of independent board members, completion rates for ethics training, or the number of compliance issues.
Set specific, time-bound targets to make progress measurable. For example, aim for "40% gender balance in technical roles by December 2026" or "reduce office energy use by 20% within 18 months." Clear goals make it easier to track and communicate achievements.
ESG Reporting Methods
Building a transparent ESG reporting framework requires balancing stakeholder expectations with practical realities. With global ESG regulations on the rise, it’s crucial to create a scalable approach that keeps pace with evolving requirements.
Decide how often to report based on your company’s stage and stakeholder needs. Startups might begin with annual updates, while larger organizations may move to quarterly reports. Notably, 89% of global investors want ESG performance measured against consistent global standards.
Consider established frameworks like the Global Reporting Initiative (GRI), Sustainability Accounting Standards Board (SASB), or Task Force on Climate-related Financial Disclosures (TCFD). These provide a structured approach and add credibility to your efforts. For companies operating in the EU, the European Sustainability Reporting Standards (ESRS) are becoming mandatory under the Corporate Sustainability Reporting Directive (CSRD).
Technology can play a big role in reporting efficiency. Surprisingly, 47% of organizations still rely on spreadsheets to manage ESG data. Upgrading to specialized ESG reporting tools can improve accuracy and streamline the process. Focus on data quality and consider third-party verification for key metrics to enhance credibility. Robust data collection and clear documentation of methodologies are also essential.
Aligning your ESG reporting schedule with your financial reporting calendar can simplify processes and show how ESG factors tie into overall business performance. Clear, consistent reporting strengthens stakeholder trust.
Communicating ESG Results to Stakeholders
Sharing ESG results effectively is about more than just data – it’s about building trust and showing your commitment to long-term value. A strong ESG strategy demonstrates how your company creates value while addressing risks.
Don’t limit communication to annual reports. Regularly update your website, social media, and investor materials with ESG progress. Hosting webinars or Q&A sessions allows stakeholders to engage directly with your team.
Provide context for your ESG data. Instead of simply stating that energy use decreased, explain the steps you took to achieve that reduction and how it ties into your broader goals. For example, detail how switching to energy-efficient equipment led to measurable savings.
Tailor your messaging to different audiences. Investors want to understand financial implications and risk management, while employees care about workplace culture and community impact. Consumers increasingly value sustainability – 46% of those surveyed in early 2024 reported deliberately choosing products with reduced climate impact.
Use real-world examples and case studies to illustrate your efforts. For example, Adidas highlights its use of recycled materials to showcase its sustainability commitment, while Starbucks shares updates on community service and ethical sourcing programs.
Encourage employees to become ambassadors for your ESG initiatives. When team members speak authentically about your efforts, it reinforces credibility. Consider integrating ESG topics into investor presentations by dedicating sessions to performance updates, sharing specific achievements, and inviting stakeholder questions. This demonstrates that ESG is a core part of your business strategy.
ESG Implementation Case Studies
Case studies provide a closer look at how startups incorporate ESG practices, even when resources are limited or expertise is still developing. These examples highlight the real-world benefits of embracing ESG principles early on.
Startup ESG Success Stories
CAFU, a vehicle services platform based in the UAE, revamped its sustainability reporting in 2021. Aligning with GRI and SASB guidelines, CAFU structured its ESG efforts around three pillars: Environmental, Social Capital, and Governance, Ethics, and Integrity. By supporting the Paris Agreement and aiming for carbon neutrality, the company showcased its commitment to sustainability while staying focused on its core operations. This approach strengthened its communication with stakeholders.
Goodee, a Canadian e-commerce marketplace, achieved B Corp certification in 2020 by embedding ESG values into its operations. The company prioritized diversity, with 67% of leadership roles held by women and 50% by BIPOC individuals. Environmentally, Goodee sourced 97% of its materials sustainably, ensured 95% of outbound shipments were carbon neutral, and used sustainable packaging for 94% of orders. These initiatives resonated with an audience increasingly drawn to sustainable shopping options.
Orderlion, a B2B SaaS platform serving the food and beverage industry, reduced food waste and CO2 emissions by eliminating order errors through its technology. Beyond its core product, the company hosted ESG knowledge-sharing sessions and sustainability workshops, extending its influence to clients and partners.
New Energy Nexus, a mission-driven organization, scaled its impact through strategic partnerships. In 2021, it supported over 1,000 clean energy entrepreneurs and distributed more than $18 million in funding. One partner, Takachar, developed a method to reduce smoke emissions from agricultural waste by up to 98%, showcasing how ESG-focused startups can deliver both environmental and social benefits.
The investment firm 500 Startups took a structured approach to ESG integration. In 2020, they hired Tracy Barba as Executive Director of Global Stakeholder Engagement & ESG, signaling a leadership-level commitment. The firm created a comprehensive screening survey to exclude companies in industries like weapons, tobacco, and gambling. They also shared insights publicly through the 500 Startups ESG Founder Survey Results and developed the ESG for Startups Primer to guide their portfolio companies.
Sensei Ag, an agricultural technology company, collaborated with Third Partners to embed sustainability across its operations. Starting with a materiality assessment and gap analysis, they developed a roadmap for improvement. Sensei Ag adopted most of the strategies, focusing on environmental, philanthropic, and transparency goals. Hannah B., Global CSR and Sustainability Specialist at Sensei Ag, praised the partnership:
"The Third Partners team is remarkably agile… All of the work that they do is tailored to fit the specific needs of a business…"
These examples highlight how startups can successfully implement ESG practices to enhance operations and attract investors. Key factors include setting clear ESG priorities, building internal expertise, and fostering stakeholder engagement. Research supports this approach: companies with strong ESG performance report an average ROI of 10.4%, compared to 7.4% for those with weaker ESG practices. Additionally, 70% of job seekers are more likely to apply to socially responsible companies, helping these organizations attract top talent.
The table below summarizes each startup’s ESG achievements and their business impact:
| Company | Industry | Key ESG Achievement | Business Impact |
|---|---|---|---|
| CAFU | Vehicle Services | GRI/SASB aligned reporting, carbon neutrality | Boosted stakeholder trust and regulatory compliance |
| Goodee | E-commerce | B Corp certification, 97% sustainable materials | Increased brand loyalty and differentiation |
| Orderlion | B2B SaaS | Eliminated order errors | Reduced food waste and CO2 emissions |
| New Energy Nexus | Clean Energy | Supported 1,000+ entrepreneurs, $18M funding | 98% reduction in agricultural waste emissions |
| Sensei Ag | AgTech | Implemented sustainability roadmap | Enhanced efficiency and stakeholder engagement |
These case studies demonstrate that ESG integration doesn’t have to involve large upfront investments or drastic business model changes. Instead, successful startups focus on areas where they can make a meaningful difference, laying the foundation for sustainable growth. The secret lies in setting clear priorities, tracking progress, and sharing results transparently with stakeholders.
Getting Started with ESG
Starting early with ESG can make a world of difference. Research highlights that 68% of startups are now incorporating ESG principles right from the beginning. Those that do often enjoy up to a 10% valuation boost compared to their competitors. Moreover, 79% of investors consider ESG risks a key factor when making investment decisions.
Next Steps for Founders
Once you’ve established your ESG priorities, it’s time to take actionable steps toward integrating them into your business. Begin by defining your company’s values, mission, and vision. This clarity serves as the backbone for setting ESG goals, helping you pinpoint the environmental, social, and governance factors that align most closely with your industry and business model.
Use tools like the Sustainable Accounting Standards Board (SASB) to dive deeper into ESG factors specific to your sector. Combine this with insights from your materiality assessment to identify ESG risks that could also affect your financial outcomes.
Form an ESG task force within your organization to spearhead your strategy and ensure consistent application across all departments. Early engagement with stakeholders is crucial – integrate ESG into your governance documents and develop a clear implementation plan. This should include focused training and open communication to ensure everyone in the company is on the same page.
These steps, when aligned with the operational and reporting frameworks mentioned earlier, can help create a well-rounded and effective ESG strategy.
M Accelerator‘s ESG Support Services
M Accelerator offers tailored support to help startups navigate the complexities of ESG. They work closely with founders to create customized ESG roadmaps, complete with realistic metrics and timelines. Instead of relying on generic templates, M Accelerator collaborates with startups to identify the ESG factors most relevant to their unique circumstances.
Their approach goes beyond individual companies by encouraging collaboration between portfolio businesses and external partners. This fosters a shared learning environment where startups can exchange insights and team up on initiatives that benefit the broader ecosystem.
Additionally, M Accelerator helps startups identify sector-specific ESG risks and uncover opportunities that align with their product-market fit. With a network of over 500 founders and extensive connections with investors, M Accelerator also assists startups in effectively communicating their ESG commitments. This not only sets them apart in competitive funding scenarios but also helps establish long-term advantages in their markets.
FAQs
How can startups identify and focus on the most important ESG factors for their industry?
Startups can begin addressing ESG (Environmental, Social, and Governance) factors by taking a close look at the specific challenges and opportunities tied to their industry. A good starting point is understanding what matters most to key stakeholders – like investors, customers, and employees – and identifying ESG risks that could directly affect business operations.
For instance, a manufacturing startup might zero in on cutting waste and improving energy efficiency to reduce its environmental footprint. On the other hand, a tech startup might prioritize social issues, such as fostering diversity within the workforce or ensuring data privacy. Keeping up with regulatory requirements and industry standards is equally important to maintain compliance and set the stage for long-term growth.
To make this process smoother, consider creating an ESG task force or assigning a dedicated team to weave these factors into your overall business strategy. Taking steps toward ESG early not only minimizes risks but also enhances your brand’s reputation, builds trust, and makes your business more appealing to investors.
What challenges do startups face when adopting ESG practices, and how can they address them?
Startups often encounter hurdles when trying to implement Environmental, Social, and Governance (ESG) practices into their operations. Tight budgets can limit what they’re able to do, while a lack of in-house expertise makes it harder to create and execute effective strategies. On top of that, navigating complicated regulations and managing ESG-related data can feel like a daunting task for companies just starting out.
One way to tackle these issues is to start small. Focus on steps that are manageable and align with your core business goals. Bringing in ESG experts or leveraging technology tools can bridge knowledge gaps and make compliance less overwhelming. Teaming up with other organizations can also be a smart move – it opens the door to shared resources and fresh insights, helping startups strengthen their ESG efforts without stretching themselves too thin.
How can startups track and share their ESG progress to attract investors and build trust with stakeholders?
Startups can effectively monitor and communicate their ESG (Environmental, Social, and Governance) progress by setting clear, measurable goals that align with both investor expectations and regulatory requirements. These goals might include cutting carbon emissions, boosting workplace diversity, or refining governance practices.
Leveraging established frameworks like the Global Reporting Initiative (GRI) or the Sustainability Accounting Standards Board (SASB) ensures your reporting is both reliable and consistent. To further demonstrate your commitment, consider regular updates for stakeholders through concise reports or certifications, such as earning B Corp status.
Involving employees in ESG efforts is equally important. Build a culture of accountability and openness by engaging your team in initiatives and celebrating milestones together. This approach not only attracts socially conscious investors but also fosters trust and loyalty among all stakeholders.
