A startup’s guide to implementing ESG

‘The furnaces of the world are burning about 2,000,000,000 tons of coal a year. When this is burned, uniting with oxygen, it adds about 7,000,000,000 tons of carbon dioxide to the atmosphere yearly. This tends to make the air a more effective blanket for the earth and to raise its temperature. The effect may be considerable in a few centuries.’ 

This is a newspaper excerpt from 1912, which warns about the consequences of unchecked growth. Global concern about the survival of future generations and the planet continued to mount until 1987, when the United Nations defined sustainability – “meeting the needs of the present without compromising the ability of future generations to meet their own needs.”

What is ESG?

Essentially, sustainability is the ability to maintain a process continuously over time without depleting resources. This view of responsibility demands governments and business players to balance profit with long-term externalities.

With the birth of Environmental, Social, and Governance (ESG) at the turn of the millennia, investors and stakeholders have tangible metrics to determine if a company is sustainable or not. ESG is a framework that investors and other stakeholders use to understand how a company is managing risks and opportunities related to sustainability. ‘Environmental, Social, and Governance’, are the three main factors in measuring sustainability for companies. While ESG is first used in the context of investing, stakeholders include not just the investors but also a company’s customers, suppliers, and employees, all of whom will be impacted by a company’s operations.

While the focus on sustainability through ESG principles continues to gain momentum globally, a crucial question arises: What about startups? This begs the question of not only whether ESG is relevant for them but also how they can effectively implement it into their operations.

Why is ESG important for startups?

Just as learning a new language is easier for a child than for an adult, startups have a unique opportunity to cultivate their ‘ESG muscles’ right from the start, minimizing the need for massive adjustments later on. Early integration of ESG principles not only streamlines finding product-market fit but also increases a startup’s overall resilience and sustainability.

During the early stage of a company, startups invest significant time in refining their products or services, establishing a customer base, and generating revenue or traction. East Ventures provides multi-stage investment, from Seed to Growth stage investments, for over 300 tech companies across Southeast Asia. We understand and recommend different approaches to ESG implementation for startups according to their growth stages and industries. While full ESG implementation is not a mandatory focus at this phase, we have seen a flourishing number of early-stage startup founders who recognize the value of ESG in gaining a competitive advantage.

Implementing ESG practices early-on offers long-term benefits for startups. Beyond enhancing brand reputation and attracting quality talent, it also equips startups with the tools to effectively manage risks. This forward-thinking approach not only boosts business performance and survival rates but also opens doors to strategic partnerships and funding opportunities.

How can startups start implementing ESG?

1. Engage with stakeholders 

Engaging with investors and stakeholders will be a way for startups to communicate their intention to implement ESG. East Ventures has developed a Sustainable Investment Framework to assess and monitor our portfolio companies’ climate impact. As part of this framework, our Investment and ESG teams can work with startups to develop an ESG and impact implementation roadmap specifically tailored and relevant for their business, starting with providing a guideline for compliance and helping startups set and achieve ESG metrics and goals on a reasonable timeline.

2. Identify ESG risk factors 

Startup founders should map out the ESG risk factors related to their businesses and the industry in which they operate. These material ESG risks often overlap with financial risks and should be prioritized. We advise founders to build their companies’ ESG capacity and reassess risks as the company grows. Good corporate governance and business integrity practices are essential to be embedded by founders and management teams early. For example, complying with applicable laws and regulations, aligning with good standards of transparency and disclosures, developing whistleblowing mechanisms, and enhancing the protection of cybersecurity and data. 

3. Identify ESG-related opportunities

In addition to ESG risks, startups can identify potential impacts and opportunities, a process which will be beneficial to find their product-market fit. Once high-level ESG opportunities are identified, startups can engage with investors and stakeholders to act on them. To support our portfolio companies in seizing ESG opportunities, we have a dedicated Value Creation team, working together with our Investment team and ESG specialists to foster collaboration between portfolio companies and external partners to maximize impact. For instance, we facilitated collaboration between Waresix, an end-to-end integrated solution to logistics challenges, and GoKomodo, an agriculture supply chain platform,  with corporations to offer logistics solutions for the distribution of agricultural products on a larger scale.

What does a sustainable company look like?

After following these steps above, startups can grow into a sustainable company, effectively integrating ESG considerations into its core business strategy and decision-making.

• Environment: A sustainable company prioritizes environmental stewardship by implementing practices that minimize its ecological footprint and mitigate environmental risks. This may include adopting renewable energy sources, reducing waste and emissions, and sourcing products from fair-trade organizations to minimize negative impacts on the environment.
• Social: In terms of social responsibility, a sustainable company actively engages with its stakeholders, including employees, customers, suppliers, and local communities. It invests in employee well-being, diversity, and inclusion initiatives, fosters positive relationships with customers based on trust and transparency, and contributes to the social and economic development of the communities in which it operates.
• Governance: Governance refers to how an organization is led and managed. In a company with good governance, leadership incentives are aligned with stakeholder expectations, shareholder rights are viewed and honored, and internal controls are in place to promote transparency and accountability.

Companies can measure their ESG metrics and progress towards ESG goals, and present them in a Sustainability Report to their stakeholders, also known as ESG reporting. The practice of disclosing ESG risks in a Sustainability Report enhances transparency and accountability, using ESG reporting standards as guidance, such as the Global Reporting Initiatives (GRI),  Sustainability Accounting Standards Board (SASB), and the Task Force for Climate-related Financial Disclosures (TCFD) frameworks.

East Ventures released its first Sustainability Report in 2022, and recently launched the third edition of the East Ventures Sustainability Report for 2024. Doing the work of ESG reporting for a Sustainability Report serves as a critical tool for not only showcasing our efforts but also helps us track and realize the positive impacts we envision for our firm and the entire ecosystem of startups and partners.

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This article is a summary of insights from East Ventures’ interview in Kompas CEO Talks, with additional insights from ESG Specialists at East Ventures.