ESG essentials – how start-ups can benefit from ESG

A new wave of start-ups is launching that puts concerns such as sustainability, carbon reduction, and improved working conditions at the heart of their businesses.

From waste-free shops to plastic-free loo paper, some start-ups are embracing new ways of working that benefit their communities and the environment.

Even if your start-up isn't squarely focused on innovations that tackle issues such as net zero, many smaller businesses may benefit from adopting some of the key principles of environmental, social and governance - known as ESG.

It considers the impact a company has on its employees, customers and the communities where it operates.

ESG has been a focus for larger companies seeking to become more transparent about issues such as pay equality and working conditions in their supply chain.

According to a report by McKinsey (.pdf, 718kb) Opens in new window, small businesses could also benefit from putting ESG approaches in place, potentially making them more attractive to customers and investors.

What does ESG stand for?

ESG is an abbreviation of environmental, social and governance - three key areas that apply to businesses:

• Environmental - refers to the impact of your start-up on the environment, including the sustainability of your supply chain, your carbon footprint and energy consumption.
• Social - focuses on your business culture, how it interacts with communities and the internal policies related to diversity and equality.
• Governance - refers to the internal process and practice of legal compliance, transparency and decision making.

Benefits of ESG

Adopting ESG may prove beneficial for any business regardless of size, such as better use of resources and improved employee productivity, according to McKinsey.

For start-ups, embedding the principles of ESG may help shape your business strategies and optimise your working culture.

It may help reduce costs

Focusing on the environmental elements of ESG may help reduce your waste and energy consumption, potentially leading to reduced bills.

ESG concentrates on the sustainability of your business within your product or service, the supply chain and start-up operations.

Optimising these factors in line with sustainable practices can help reduce your waste and energy consumption.

Installing energy-efficient measures, such as renewable energy sources, could reduce your energy bill by 18-25%, according to the Department for Business, Energy and Industrial Strategy.

Being mindful of how you use energy can also help reduce your bills. Lowering the thermostat by a single degree could cut your energy use by up to 8%, according to the Carbon Trust.

Turning off computers and electricals outside of standard working hours may help reduce your bills.

It can help attract and retain staff

Having ESG policies may prove effective in recruiting and keeping staff. Research by Anthesis found that 53% of workers believe a company's sustainability is an important factor when choosing a company to work for.

The same study found that 40% of the UK workforce surveyed were disappointed in their current employer's lack of sustainability efforts.

Ensuring your business complies with diversity and inclusion criteria under ESG can help attract a more diverse employee pool - and that can be good for your business.

According to the Chartered Institute of Personnel and Development, people want to work for companies with good employment practices.

It found that creating open and inclusive workplace cultures is an important business benefit and can attract customers and employees.

It may enhance your start-up's revenue

Companies that avoid short-term solutions and focus on the consumer and environment may boost their reputation and edge over the competition.

An ESG-centred business can boost brand awareness and capture the attention of consumers.

The Mckinsey research found that customers are willing to pay more for 'greener' brands. Over 70% of people said they would pay an additional 5% for a green product if it met the same standards as non-green alternatives.

It can attract funding for your start-up to grow

A strong ESG plan can open doors to further funding and investment for your start-up.

Planning for the long-term, particularly in terms of sustainability, may appeal to investors as a signal of your commitment.

As the environment is becoming an important consideration for businesses, some investors may be looking for sustainably minded companies to meet consumer interest.

According to research by Charles Stanley, it's expected that almost half of UK investors (48%) are looking to increase their ESG investments over the next three years.

Investors are increasingly supporting ESG factors and may be willing to invest in businesses that show these in their plans.

Funding for start-ups wanting to implement ESG may be more likely due to the sustainability of their strategies and branding.

As their ESG plans attract growth, consumers, and employees, operating a start-up with a strong ESG focus could prove helpful for start-ups looking to attract future investment to support their growth.