Don’t be a rabbit
To say the least, the world has been a scary place lately. A grueling whirlwind of violent conflicts, health crises, rising inequalities, negative market shifts, and turbulent political climates is affecting every entity on planet earth, from governments and big corporations, to families and individuals. And to top it off – a climate crisis catching up at an even greater speed resulting in natural disasters, causing thousands of people to relocate, and biosystems to collapse. What a time to be alive.
It’s impossible to simplify the weight of such issues, and in the attempt of trying to decide what beckons for a solution first, we risk ending up like a rabbit in the line of fire of a hungry fox: we get so overwhelmed that we end not moving . Or paradoxical, moving in the wrong direction. So, why are we (read: the majority of investors; McKinsey & Co. estimates that more than 90% of S&P 500 companies now publish ESG reports) turning to “ESG investing” and expecting founders to incorporate Environmental, Social, and Governance thoughts, actions, and strategies already before raising an A-round?
Are we having the right ‘ESG’ conversation?
As investors, regulators, and the public awareness of ‘ESG-investing’ develops, media attention has followed. Recent discussions have claimed that even when ESG can be measured, it’s difficult to nail down its link to financial performance. Others have characterised ESG as ‘little more than a glorified marketing exercise’. And some have slammed it big time for failing – as inequality and greenhouse gas emissions continue to rise. Oxford’s Robert Eccles says ‘ESG’ label has lost its value completely. And ESG defenders state the movement is now too big to change the narrative.
But, in the interim, we cannot ignore the underlying rationale for ESG and what it’s attempting to achieve and affect. While we’re busy discussing what to call it, how to measure it, and how to go about it, we cannot stay in the same place. These discussions can take years – just look at how long it took for the standard financial reporting we see today to develop. Imagine what our world would look like then if we’ve been looking away from important environmental, social, and governance issues for that entire time. Don’t be the rabbit. We can’t wait for the evolution of ESG to be fully formed.
The three letters have indeed become the subject of an intense and interesting debate. A well-needed one, since developing a common language and clear standards in many ways can be the solution to the greenwashing wave we’ve seen lately. But where does this discussion leave us and most importantly where does it leave our founders? Let’s take it from scratch.
Our view on ESG: The key to the full picture
Let’s start with our favourite clarification so far of what ESG is and isn’t: “ESG is an investment research discipline. It is not a specific investment style, it is not an asset class, and it is not a strategy”. Instead, ESG describes an analytical approach. Stick with us while we try to explain the underlying rationale here.
All business operations give rise to externalities. No matter if we are looking at GHG emissions, effects on local and global labour markets or suppliers’ health and safety, such externalities are arguably increasing (along with the urgency of them) as the world becomes progressively interconnected. Today, the precondition for sustaining long-term value, which is seen to be the business case doctrine, is to manage and address externalities. For any business, not taking such into account would lead to erosion of social licence – that is, the perception by stakeholders that a business or industry is acting in a way that is fair, appropriate, and deserving of trust – as customers, employees and regulators are clearly taking notice.
The ESG research discipline is therefore an essential part of thorough and comprehensive investment research. Most investors want to evaluate environmental (E) and social (S) considerations that could influence the performance of the startup. Most investors also want to identify the governance (G) structure of a startup and/or its funding strategy and assess whether it’s properly prepared to govern successfully. And to those investors who don’t include ESG in their investment analysis, we must conclude that they don’t want to analyse the full picture.
Where does this leave us, and more importantly: our founders?
Bottom line: It is clear that the controversy over the acronym “ESG” isn’t going away anytime soon. And it’s a healthy debate we need to have. Better when the debate is a constructive one rather than one where “ESG” is being given a political connotation even its supporters never intended. As mentioned, the language may continue to morph, but the underlying proposition and need to make changes will not. While these undertakings are by nature complex, the urge for companies to approach (ESG) externalities as a core strategic challenge and earn their social licence has not reached its peak (but rather seem to be ascending). Not to mention, the finance industry keeps using and increasingly expects ESG considerations, analyses, reports, and initiatives when making investment assessments. For our founders, that means that these considerations can be vital in raising a series A round.
It’s our job as investors to do a thorough analysis when we invest in startups, in order to take our own externalities into consideration. However, it is also our job (especially as the early, early stage investors we are) to support our startups in trying to address and manage their externalities to future-proof their organisations and create long-term meaningful impact. On that note, we have a little something for you.
The ESG Napkin Sprint
In an effort to hinder the sustainability buzz from becoming white noise and just another headache for already pressured founders, we launched the ESG Napkin a year ago. While we hope all of you’ve already taken the tailor-made framework for early-stage tech companies out for a good spin, and gotten a sense of where to start on your ESG efforts, we’re not done yet. Here’s the next step: the ESG Napkin Sprint.
A sprint? Sounds exhausting. But not to worry, The ESG Napkin Sprint is (at least in our completely unbiased opinion) rather an effective and comprehensive support tool for operationalising the ESG Napkin into action. Consisting of three exercises, the Sprint is a workshop in which founders and members of the team gather for 2 hours to ensure the foundation of your startup is built upon the right set of values.
Go the ESG Napkin framework and sprint here
How to sprint
With plenty of stuff to keep an eye on when running a startup, we understand that assessing the environmental, social, and governance aspects of your journey might feel overwhelming. The three exercises of the sprint are therefore constructed to push the participants (that’s you) through an ESG funnel, in order to wrap your heads around where you’re going, how you’ll get there, and where to start. Each exercise contains a specific set of goals, outputs, mechanics, and tasks – and the best part: they’re each time-constrained to under 30 minutes. Finishing off with a pinky swear pledge (yes, we’re deeply serious), our hope is that your ESG confusion will be transformed into collective willpower and a clear path to change the world for the better.
Here’s what you need to know:
This sprint is preferably conducted by a team of 3-4 top-level employees (which might be the whole team at this stage – we know), perhaps over your favorite office meal or takeaway. By the end of the workshop, you’ll have a to-the-core action plan for you to prioritize and concretely track progress internally. Some would call it an ESG strategy, others would simply just understand it as a necessary internal tracking to run a company today.
To ensure the initiatives are anchored properly in top-level business strategy, the ESG strategy should be a fixed part of the agenda for every board meeting to come. We’ll do our part in asking for it in our portfolio, but since we (sadly) do not have board seats in every single kick-ass startup out there, you’ll have to be our stand-ins.
We promise you; that these 2 hours will be among the ones best spent in the history of your business. In time, when you get out there and fundraise for later rounds, having a structured ready-to-go ESG strategy and being comfortable with presenting your actions to investors will put your business miles ahead of the competition.
Want to tell us we’re completely off? Find us here.
One of the main reasons we chose to tell you all about what we’re working on, even while it’s still a work in progress for our own internal operations, is to get your feedback on it. Luckily, we have the perfect place for catching some deep talks and feedback sessions (almost like someone might have planned it…) – reach out to our Head of ESG and Impact, Camilla Møller Espersen, to hear more.
