Entrepreneurs

The Citizen Startup – Why Investors Are Becoming More Interested In ESG Measures.

As a writer who focuses largely on the world of fast-growth, tech-driven businesses, I have a tendency to work from the premise that entrepreneurship is, by and large, a good thing. After all, entrepreneurs build companies, create jobs and solve big problems and in doing so they possibly make the world a better place.   

But of course, it isn’t nearly as simple as that – and nor is it always quite so benign. Yes, successful founders do indeed create jobs, but those who disrupt their chosen markets may also put significant numbers of people out of work in the process. What’s more, the new jobs that are generated may be more precarious and not so well paid as those they replace. This has consequences for the social fabric in the most affected communities. And when technology businesses cluster together, they can affect neighborhoods in even more profound ways – for instance, by pushing up property prices and forcing local people out. 

Then there’s the question of environmental impact. An all-digital company might look pretty green from the outside, but its total power usage could tell a different story.

Maybe we should even question whether entrepreneurs actually solve big problems. They do, of course, but arguably the focus tends to be on problems recognized by relatively privileged founders and their VC backers. Thus many of the issues facing societies go unaddressed.   

Something Is Stirring

But something interesting is happening. Antoine Baschiera is co-founder and Director General of Early Metrics, a company set up to provide investors with data on early-stage companies in order to support investment decisions. Baschiera says VCs -some of them at least – are becoming increasingly interested in how startups are scoring on their environmental, social and governance (ESG) policies and practices.   

“About two years ago began to be approached by investors specializing in impact deals. We started to talk with them about how you could measure impact,” he says. “But more recently, classical investors have been talking to us about ESG measures.”  

So what lies behind the rising interest in environmental, social and governance performance. “At the partner level, it can something that arises from conviction,” Baschiera says. “But at the level of the organization, there is an awareness that standards around ESG may become compulsory or subject to regulation.”  

To put it another way, startup businesses that don’t take their relationship with the environment or their communities sufficiently seriously may end up struggling to deal with regulatory,legal or reputational issues at a later stage. 

An Opportunity To Educate

At the moment, Baschiera doubts whether a low rating on ESG issues would deter investors. However, he thinks that some investors will take the opportunity to educate startups on ESG.  

But what does that mean in practice? Large companies are by now accustomed to reporting on environmental, social and governance practices, but the kind of measures adopted by a business with 1,000, 5,000 or 20,000 on the payroll simply won’t be appropriate for a startup employing 10 people. “A startup won’t usually be in a position to hire a green director,” says Baschiera. And nor is it appropriate to ask a small business to fill the kind of sixty or seventy-page surveys that might underpin reporting in the corporate world.  

However, he sees a number of areas where even very early-stage companies can begin to assess their own performance.  

Where To Look

On the environmental side of the equation, he says startups can and should look at energy usage not only in their offices but also, crucially,  in terms of the processing carried out on server farms by their providers.  “The choice of storage providers is the area that makes the biggest impact,” he says.  

Turning to the societal side, he sees two important areas that small companies should consider. One is the precarity of the workforce. “If a startup has 10 people on the payroll, maybe only four will be on full-time contracts,” he says.  

In the short term, this flexibility might be seen as a good thing, allowing employers to scale and evolve while bolstering the core team with those on more casual arrangements. It can store up trouble for the future, however, For instance, in the UK, both Uber and Deliveroo have faced court action over the status of their (respective) drivers and delivery riders. 

Gender, age, and race diversity is another area that Bachiera says startups should be aware of.  

Governance Matters  

Governance is perhaps less of a problem, not least because businesses that seek to raise funding are probably aware of the importance of good governance. Not only do they have advisors, but lead investors will often put representatives on their boards. “There can be a low level of formality, though,” says Braschiera.  He cites the example of pay and benefits. A business might give a few early employees stock options. Others coming in later might miss that benefit, despite doing similar jobs. Equally, basic pay could like lack consistency across the payroll. There is a need for transparent and accountable systems.

All of this might sound like good housekeeping, but some businesses are going the extra mile to establish themselves as good citizens. Directly after talking to Baschiera, I attended an online event organized by Phoenix Court Works, a co-working center situated in the London Borough of Camden, a district where social deprivation and great wealth sit side by side. For Phoenix, a key part of being a good citizen is developing relationships with the community. Its initiatives include providing educational support and food packages for a local school during the pandemic and also creating events to inspire children to consider careers in the innovation economy. 

So perhaps, there is an argument that attention to the environment, communities and governance should go beyond good house keeping. Businesses that exist in and depend on communities (be they stakeholders or neighbors) might benefit immensely from forging positive links.

Measuring good citizenship is a tricky business, but it is likely to play a bigger role in how companies are assessed, not only by investors but by customers.

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