3 ways startups ‘do ESG’ well

It’s becoming less common to find high-growth companies that are not prioritizing environmental, social and governance factors in their organization.

If you’re an entrepreneur, failing to disclose how your business is compatible with a net-zero economy could result in the loss of a board seat as venture capitalists are choosing startups that build around these pillars. In addition, two-thirds of investors see ESG criteria as core to their decisions over the next three years, and Silicon Valley is passing over investments if ESG-themed activism is not adequately addressed

But beyond the alphabet soup of business acronyms, lip service to sustainability and lofty commitments often backed by hollow plans and empty budgets, what startups are actually “doing ESG” well? 

Like most good business strategies, the answer is simple to articulate but difficult to execute. The companies doing ESG well are taking a programmatic approach: Rather than starting with one product in one department, ESG considerations are integrated into the fabric of their business, so profit and progress on environmental and social fronts are fused together; positive impacts in these dimensions are core to a business versus a nice-to-have afterthought. This approach is full of common sense but, unsurprisingly, difficult to actually do.

With the financial pain, reputational risk and opportunity cost of ignoring ESG all present, plus the corporate mindset shift from shareholder to stakeholder capitalism, the market is finally encouraging this type of programmatic approach to ESG. So how does a next-gen company do this?

1. It all starts with the mission 

ESG must be an implementation of the startup’s mission, not just a pithy, perfected statement on the website. A company’s mission reflects corporate values and leadership buy-in to ESG goals, which begets a higher probability that the organization will deliver on these objectives and succeed in creating a regenerative, rather than extractive, business that has positive environmental and social impact. Everyone in the C-suite to the boardroom must understand and endorse the mission even if, and especially when, it requires hard tradeoffs. 

Take Maalka. This pre-seed startup provides a data analytics platform for cities and corporations to become more sustainable with the mission to “accelerate the adoption of sustainability best practices in portfolios of buildings around the world, enabling healthier workplaces and reducing environmental impacts.”

‘Doing ESG’ well requires time, which is why so many companies fail to do it successfully.

Three and a half years ago, Rimas Gulbinas, Maalka’s founder and CEO, had a vision to build a tool that streamlined the way cities were benchmarking their sustainability efforts and offered insight to the technology solutions needed for both scale and security. One and a half years in, his team revamped its entire product, relying instead on partnerships with trusted brands such as Cushman & Wakefield and Green Schools Alliance to go-to-market. This pivot allowed the Maalka team to more quickly identify energy usage patterns, replicate best practices and scale positive environmental impact among its partners’ clients. 

Rather than creating new scores to rate buildings and different standards to assess energy efficiency and quality of life, all while competing to educate an increasingly fragmented market, this strategic shift allowed the Maalka team to maximize their impact by powering their partners’ most established and readily available programs. 

Today, Maalka can track energy, water, waste, carbon accounting and life-cycle impacts for an organization. That organization can then set and align sustainability goals with targets, a scorecard and a dynamic dashboard. K-12 schools establish objectives aligned with United Nations Sustainable Development Goals, while cities track their progress towards their climate action plans. All platforms are interoperable, and each partner can sell its own established programs powered by Maalka.

Maalka’s mission had environmental (“reducing environmental impact of building portfolios”) and social (“enabling healthier workspaces”) considerations from the start. Rather than a standard startup goal of amassing the most users to later monetize, its ESG north star directed the product revamp in a programmatic fashion that kept every team member responsible to these aims.

Still, there remains room for improvement. I discussed with Gulbinas the opportunity to execute on the social dimension of its mission next — how Maalka’s platform could highlight hot spots of inequity across school campuses, for example, and how the experimental ecosystem of the platform facilitates quick survey deployment to close “the huge gulf between results of data analysis and enabling follow-up questions” as he put it. 

Once data has led the user to a discovery, their team can release surveys to gather more input on equity-based metrics to finesse needs in a live data set all through Maalka’s platform; this iterative process means data can drive pointed action and bridge to the often elusive outcome of change to build more sustainable, healthier learning and working environments. 

AppHarvest Facility

2. ESG is a long game that requires adjusted timescales for impact

“Doing ESG” well requires time, which is why so many companies fail to do it successfully. Our quick win culture is not only entrenched but also heavily incentivized, meaning immediate results dominate how we make decisions. Even more so in the world of tech, we are trained to track weekly, if not daily, progress in our scrums and standups. 

Therefore, repetition is necessary to build habits: ESG is a long game. Systemic challenges require overhauls. If our current system created the climate crisis, the same system will not get us out of it. Playing the long game means adjusting your timescales and organizing your teams around holistic outcomes — and not expecting immediate results. 

AppHarvest is a fast-growing indoor agricultural B Corp doing just this: It is taking immediate action to implement its ESG strategy but also planning for longer-term impact. The company is focused on reducing the environmental footprint of agriculture while empowering communities in Appalachia, a region historically tied to coal mining. Jackie Roberts, CSO of AppHarvest, shared that the company’s business “is as simple as it gets. It’s about customers, competition and cost. And ESG is relevant to each of these.” 

AppHarvest knows customers want fresh produce grown sustainably — not imported tomatoes covered in pesticides from regions with horrible labor laws. It knows that the competition is not delivering on sustainability demands of consumers, and that doing so gives it a competitive advantage and allows it to deliver on a moral imperative. The company also knows that it can lower the cost of fresh produce by bringing farming indoors to create closed loop solar-powered systems that use up to 90 percent less water, all while paying workers a certified living wage. 

The mission that AppHarvest CEO Jonathan Webb put in place has led to a fourth dimension of ESG impact: employee engagement. AppHarvest is demonstrating what a just transition looks like, as it brings economic opportunity to historically coal-reliant counties through jobs that include training in indoor ag operations, 12 months of guaranteed employment, vacation and health benefits, plus $1,000 of stock options. All of these incentives come with the goal to achieve 95 percent employee engagement, which is seen as a core strategy to drive profitability and create value for people, planet and profit. 

Making incredible progress on all these fronts has required patience and longer timescales for ESG impact by necessity. Roberts points out that “striving to be 5 stars in environment, nutrition and workforce development to overhaul the agricultural industry cannot happen overnight.” Everything takes longer when you’re trying to move the needle, but sacrificing holistic impact for speed is missing the point. 

However, implementing ESG should by no means be a slow process. You can immediately revise your company purpose, conduct life-cycle analyses and hold every team accountable to the environmental and social considerations of your shared mission. 

3. ESG must be market-based 

If your company’s ESG strategy stops at the nice story in its colorful annual report, your organization is doing it wrong. Social impact initiatives often struggle to identify quantifiable and measurable outputs. This difficulty lends itself to pilot projects that languish in unrealized potential and bespoke one-off programs that are so highly customized they fail to scale. 

Finding market-based solutions for social impact is a strong antidote to this common pitfall and a key step to taking a programmatic approach to ESG — one that is designed for and will facilitate scalability.

LifeStraw, a water filter and purifier for-profit brand, embodies this best practice. With raw firsthand experience from working in on-the-ground healthcare NGOs in Bolivia and Zambia, the CEO of LifeStraw, Alison Hill, built her company around the antithesis of philanthropy. Tackling global problems with a market-based approach was the only path she saw to achieve huge, scalable, social impact. 

Surprisingly, however, the board originally disagreed with her approach to enter the retail market. Alison wanted to sell a consumer version of the brand’s now-eponymous product — a pipe water filter that removes bacteria and parasites, including the Guinea worm, a major cause of chronic health problems across Africa and Asia with no existing vaccine to protect against it. The traditional one-for-one program (one purchased, one donated) was too stunted of a model to achieve broad long-term health outcomes that were integral to the company’s mission. 

With raw firsthand experience from working in on-the-ground healthcare NGOs in Bolivia and Zambia, the CEO of LifeStraw built her company around the antithesis of philanthropy.

She managed to convince the board to manufacture and sell LifeStraw to the American market as a means of improving the quality of life for communities in low-resourced countries, on the condition that she had oversight and strong governance across the entire value chain, from “the cash register at the retail store to a safe water program in schools in western Kenya.” 

In just three years, Hill has achieved incredible financial, environmental and social success for LifeStraw with a 30 percent compound annual growth; the company also secured the market leader position in its outdoor sports category. True to her strategy, this revenue has not only helped achieve LifeStraw’s social commitments to provide safe water programs to over 2,000 schools and 4 million school children, it’s also facilitated the company’s social impact in extending its commitments to schools for five more years, and building local governance to manage ongoing activities such as hygiene education, training and filter maintenance. 

What next?

Good intentions are great, but they’re inadequate when it comes to affecting real change, including putting a programmatic ESG approach in place. Here are a few key pitfalls that I’ve seen companies make when trying to implement their ESG strategy:

  1. Forgetting the social dimension. The environmental angle of ESG is arguably the most mature, most understood by corporations, easiest to quantify and most easily translated to the investment community. However, every mission needs to answer the questions: for whom, and with whom? Doing so will ground people in a mission that centers people and both the environmental and social positives that arise from the organization’s work for and with key communities on the frontlines of the climate crisis. 
  2. Taking a reactive piecemeal approach. With the deluge of demands founders, CEOs and startup leaders face today, it’s very normal to focus on the here and now of the business. While it may feel like sales today over environmental or social impact tomorrow is the obvious choice, it is definitively the wrong strategy. Organizing teams and timescales so they are not taking a reactive approach is at the heart of understanding ESG. Developing a program to manage environmental and social issues is as equally important as knowing your customers, managing your supply chain and staying apprised of M&A activity in your sector.
  3. Treating ESG as an afterthought. ESG is not lipstick on a pig, or icing on a burnt cake. If you’re creating surface-level environmental and social initiatives, your company is likely participating in greenwashing, rainbow washing or, simply put, fake activism. Brands and businesses are being held accountable beyond their social media posts and one-time donations. Consumers will know, and it could cause damage to your company’s reputation, investor attractiveness and bottom line unless you take a truly integrated programmatic approach to ESG. 

All in all, there’s no shortage of fast-growth companies doing ESG well, each with their own unique programmatic approach.

Impossible Foods’ mission extends beyond producing plant-based foods to “transforming the global food system,” which requires reducing our intense reliance on water, land and energy resources used to produce meat, and supporting food security and social justice through its partnerships with Colin Kaepernick and his Know Your Rights Camp.

Terraformation is literally planting seeds of change to reverse climate change at scale — not only through its decentralized network of solar-powered seed banks but also through forestry tech and financing. Its “reforestation in a box” solutions overcome key bottlenecks to native restoration that result in growing more forests, sequestering the amount of carbon necessary to avoid irreversible runaway climate change and creating workforce development opportunities in denuded and desertified regions around the world.  

So a SaaS platform, indoor ag shop, outdoor gear manufacturer, burger company and tree planter all walk into a bar… I will spare you the bad joke and leave you instead with the thought that anybody and every company can “do ESG” well. Taking a programmatic approach to it will result in differentiation, competitive advantage and higher morals. Otherwise, the joke’s on us.

https://www.greenbiz.com/article/3-ways-startups-do-esg-well