The transition to net-zero is a collective effort involving stakeholders at every level and stage of business, government, and society. SMEs, corporations, startups and investors all have a crucial role to play in creating the urgently needed transition towards an economy that works in harmony with nature. But how much progress has truly been made towards incorporating ESG as a business norm? Are companies paying lip-service towards ESG or actually implementing, reporting and managing metrics?
Investors and sustainable business leaders at Climb23 conference shared first-hand insight into the change – or lack of change – that they’re seeing in ESG as a business norm.
Adam Sutcliffe, Head of Mentoring at British Design Fund said that when it comes to receiving pitches from startups, the business’ ESG plan is often missing:
“It’s only really when you start banging the ESG drum that everyone goes, ‘yeah, it’s me.’ At BDF, out of 35 pitches, maybe 2 have a strong ESG.”
He added that from an investors perspective, companies that understand and include ESG in their business plan are viewed as having a competitive advantage, better risk management, and drive more long-term value creation.
“Anyone that comes to us that hasn’t got within their plan, an understanding of the effect on the environment and how to minimise it, doesn’t have as much credibility as we would normally expect. So we think that they just haven’t done their job and that immediately reduces their viability or their attractiveness in terms of investment,” said Sutcliffe.
He added that the British Design Fund is increasingly seeing “an expectation in the customers of our investees for companies to work sustainably. For instance, one of our companies makes some components for safety on construction sites, and all of the large clients are saying, ‘well, what’s the return cycle? What are you going to do with all this plastic?’ There was an expectation that they thought that was part of the plan. So it’s almost inevitable that investment will go to those businesses that have properly considered their environmental impact on consumers.”
From the investor perspective, Yodaly Sierra-Rubio, Eco2wallet Founder, adds that she has increasingly seen ESG analytics used to establish investment metrics: “those former M&A or PE professionals noticed that there was a gap in the market for those investors who wanted to “greenify” their portfolios or make deals with a green flavour, and more specifically, to identify a green deal from a brown one.”
However, one of the main issues, she says, is that there are too many sustainable certifications, stamps, or indexes circling around.
So what’s the solution?
“To either create a new index and label the project you judge as sustainable as you believe it is while ranking those projects with metrics and offering them to investors, or to create software that gathers information from all the certifications and indexes and evaluate the deals in the same way a movie is judged with metrics of IMDB, Rotten Tomatoes and filmaffinity, but using ESG metrics, such as ISO, IEC, GRI, SASB, SDG impact, or any of the other twenty+ ESG standards.
“In the end, most investors want to invest with solid returns, and positive environmental metrics, and large corporates and startups are moving swiftly to serve this space,” says Sierra.
The above leads us to a deeper problem: what are carbon reductions, what is measurable, who is really responsible? According to Sierra, this has led to a trend to create and implement rules in lifecycle and emissions tracking, either with sophisticated blockchain or carbon tracing, or simply, by offering a “full” auditing process: “One of the coolest trends is using satellite imagery for sustainability and renewable energy projects. Companies who are buying data from satellites to analyse if trees are being chopped, if solar or wind or tidal activity is available, or if projects made in rural communities are being deployed,” says Sierra.
Sutcliffe adds that regulation and consumer pressure is driving faster adoption of ESG-led business:
“Big NHS contracts now, need to see a net-zero component, so anyone who sits in that supply chain, will need to think about ESG.
“A friend of mine used to work in tobacco – which is not popular and potentially going to go out of business in the next decade – so part of their strategy is to invest in other businesses, the other part is that ‘we need to look very quickly. So how can we do that? Let’s invest in things that are good.’
“As a result, you’re getting huge amounts of investment not only in terms of cash flow, but in terms of knowledge infrastructure – they’re really good at making crops and harvesting – so they’re now investing in fast-growing crops, like hemp, that do really great things for the environment. So I think there’s an opportunity for climate tech to start being led by big business.”
Businesses are increasingly acknowledging the need to consider the environmental and social impacts of their operations and some are integrating ESG considerations into their strategies and reporting. However, there is a growing urgency for greater awareness and integration of ESG principles from the startup phase onwards. To be viewed as credible by investors, startups must include ESG considerations in their pitchdeck, demonstrating their commitment to sustainable practices and societal impact: startups that proactively embrace ESG enhance their chances of securing investments.
As big businesses face mounting pressure from regulations and consumer demands, they are shifting their focus towards ESG metrics, but universally recognized standards remain a key issue.
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