Unlock Value: ESG Powered by People, Purpose, Strategy, and Culture

Written By:?Aline Eibl

When discussing ESG (Environmental Social Governance) with executives, founders, board members, and individuals in general, opinions tend to be expressed quite strongly. I wonder if fear and rejection play a role in this outcome. Haven’t we all learned that the things we fear and then face with determination have had the most profound yet transformative impact on our lives?

Ripple down effect to venture capital and startups

The ESG concept has been around for a while. Often it is lost in a sea of jargon and subject to both praise and criticism from various groups. Numerous regulations and roadmaps have been created and enforced, impacting listed companies, large corporations, and the investment industry. These regulations are rippling down and extending to businesses of all sizes, venture capital, and startups.

While some people see ESG as a burden, taking a holistic approach offers companies significant business opportunities. In fact, it is of the most significant business opportunities of this century. By embracing ESG, companies can tap into previously unseen potential to improve their financial value, long-term prospects, and resilience. It can unlock previously unseen potential, new business approaches and provides a source for out-of-the-box strategic thinking. This shift in perspective will also have a transformative impact on the entire business landscape and what people expect from businesses.

ESG is neither a standalone practice nor a check-the-box exercise

In fact, ESG is at the core of every business. It is an integral part of every business, as two factors form a company. The ‘what’ it does and the ‘how’ it does it — strategy and operations. Besides its product or service, a business must decide how it shows up and operates. Essentially, ESG encompasses the ‘how‘ aspect of business operations.

It is a broad concept that encompasses three main pillars represented in the three letters. Each of them matters equally.

Every business must address all aspects of ESG, describing the world the company operates. It includes the planet, the environment we work in, the people involved both inside and outside the business, and how we manage and govern our operations. To illustrate the meaning of it, the three letters reflect best in the following examples.

‘Environmental’?entails decarbonising and protecting our world in a comprehensive manner. This includes reducing carbon emissions, minimising air pollution, promoting a circular economy, reducing waste, preserving biospheres, and practising responsible procurement.

‘Social’?refers to creating a resilient, engaged, and supported group of employees (promoting DEI, well-being and mental health, providing parental policies). It also extends to the families, communities, and society that surrounds the business.

‘Governance’?includes all that is required to operate ethically and responsibly. It is represented in board oversight (independent board members, diversity on boards, values, decision-making processes on boards, agendas) but also entails corporate policies (linked to ESG, corporate culture, fair and equal pay, data governance, AI, cyber security), and industry certifications play a crucial role.

All that is summarised under ESG aims to ensure the reduction of negative externalities of business but increasingly thrives on creating positive impact.

ESG is critical to future-proof businesses, as it has become a license to operate for all businesses.

As a society, we have agreed on the importance of treating our environment, planet, and fellow humans with respect. To lead companies responsibly and ethically, we must embrace these values. Adopting an ESG approach is not an extreme stance; it simply involves being aware of our impact and committing to a code of conduct that promotes transparency and sustainability.

In addition to the apparent reason for doing the right thing, ESG has become a legitimate business issue.

It is a different lens on our business, but still a business matter.

ESG supports the business strategy

Globally, numerous studies indicate that ESG is not only a trending topic or starry-eyed idealism but clearly provides a competitive edge, enhances a company’s resilience and financial performance, and paves the path to a long-term market fit.

Why is that so?

ESG supports the business strategy not only by considering a more holistic and integrated approach but also by prying open old thinking and initiating beneficial discussions to take a new stance. More important than ever, encouraging discussions and fresh thinking about our strategy is crucial, considering alone the impact of the pandemic on people’s mindsets, expectations, and work habits across generations.

We must adopt new approaches to establish better rapport to attract talent, align individuals, and win customers and investors. Compared to just a few years ago, a lot has changed, and it is essential to acknowledge that we need to create better alignment with customers, employees, stakeholders, and shareholders to become more attractive to them.

Business is all about people. The success of a business depends on people. A well-defined purpose that resonates with people, aligns and motivates everyone involved is vital.

Entrepreneurs create businesses and startups from the ground up and strive to build a successful business properly. It is in their DNA. They want to build a business future forward. Today it is common sense that a company also ensures purpose, culture and an ESG-inspired strategy.

Particularly startups operate in a complex and interconnected environment, relying on people as investors, talented individuals, and stakeholders to succeed. With an ESG mindset, winning customers, attracting and retaining talent, securing committed investors, and maintaining stakeholder support become increasingly more accessible. Beyond that, a proper ESG approach might help exit companies that have already incorporated ESG policies successfully, report ESG data and, most importantly, live ESG values, or on the flip side, present a burden. Hence, ESG is, besides the product market fit, the basis to walk further.

An additional, frequently overlooked aspect of ESG is its potential to enhance operational and financial performance. ESG takes a view of ‘how’ we work and examines our approach to achieving our purpose and strategy. This requires a different perspective under which every aspect is scrutinised, analysed, and addressed, including our processes and operations, suppliers, and business partners. By doing so, we gain a deeper understanding, make necessary adaptations, and optimise our practices, supporting overall performance. This lens not only sheds light on ESG matters but also on classic operational issues that may arise, supporting overall performance — also the financial one.

Enabling business and ensuring long-term value

For all that reasons, ESG in all its dimensions is a business enabler and plays a crucial role in ensuring long-term value. Therefore, it has become popular to frame ESG as a business case, a competitive advantage, which it undoubtedly is. However, academic research *) highlights a different approach — embedding ESG into a company’s purpose. The study suggests that focusing on the business case and the trade-off between ESG and profit does not promote motivation towards pro-ESG behaviour. Just the opposite, people showed less agency. Instead, employees, customers, stakeholders, and shareholders want to be part of a change, challenge, and revolution. Ultimately, it is again about people who drive the success of every business. Therefore, we should choose a wiser, much more integrated way how to implement it to add real value with the ESG proposition.

Integrating ESG into purpose, strategy, and a positive corporate culture creates strong support for the overall business.

For that reason, I encourage adopting a comprehensive, all-encompassing, integrated approach towards it to ensure beneficial results for the business. Not a shallow, half-hearted approach but one that adds real value and can bring all people involved on the same page.

Tailor expectations according to the maturity and resources of a company

Early-stage companies with limited resources and constantly evolving business models typically prioritise growth and product design over seemingly soft-fact areas that are not easily measurable within typical venture capital indicators or do not immediately translate into them. But, to build successfully, soft and hard facts must be prioritised simultaneously. Acknowledging that ESG issues, purpose, and corporate culture are material is often challenging. Investors also might express concerns that ESG requirements would overburden startups that may not yet have many employees or are generating any revenue.

To address this challenge, we need to be pragmatic and tailor the ESG expectations accordingly. A favourable strategy is to define and fully integrate it early and let it grow alongside the business, recognising that specific tasks will be more feasible or realistic once companies grow, attract further funding, and start professionalising. It is a step-by-step approach — learning and advancing whilst walking.

Incorporating an ESG mindset, a well-defined purpose, a value-adding strategy, and a positive corporate culture within young startups are where they can have a significant impact on easing the way towards its future journey.

Whilst a clear and well-defined purpose with an integrated ESG point of view (ideally only as long as a crisp sentence) and a set of relatable values have to be in place, it is advisable to build ESG, step by step and grow it alongside the business.

To help your business flourish, starting with a low-key but holistic approach is best. It is more important to get the big picture right and spend a fair amount of time defining it wisely before you jump into action. Purpose, values, and strategy must be all under the umbrella of ESG and driven by corporate culture.

Do not start before you agree to agree

It is important to remark on the governance aspect within ESG, which is often neglected in the early stages but is a key element to drive the business and all matters entailed with it.

In the beginning, it is important, not to just start straight away, driven by pure enthusiasm. It is a journey to build a business. A long one. All travel mates must be aligned on their roadmap. Hence, discuss how you are going to walk the way together and agree on a founding team agreement, memorandum of understanding and process, defining the company governance and management rules by considering ESG principles. **)

Within that, as a founder, it is essential to establish the company’s purpose early on. As a founding team, taking your time and discussing it in all depth and breadth is indispensable, as you genuinely need to be aligned. The purpose will define the foundation of your business and guide your strategy, values, corporate culture, and other critical elements. By doing so, founders can prevent potential mismatches later and conflicts that could pose a significant risk to their startup.

*) Encouraging Sustainability: Why the Business Case Isn’t Enough. INSEAD Knowledge, 2021, Marc Le Menestrel

**) Early Stage Governance: An effective lever for the development of startups in Europe, 2023, Barth, Biache, Farrenc, Flamand, Gras, Tawil-Kummerman, Eibl

About the Author

Aline Eibl ?is an Independent NED, Venture Capital MD, Advisor, and former CEO of an international business.

She is an ESG subject-matter expert (visiting lecturer, fellow, author, and speaker) with a profound understanding of integrating all aspects of ESG into business strategy.

Aline takes stewardship in culture and talent, leading people, succession, nomination, remuneration and DEI, inspiring innovation and forward-thinking business models that create employers of choice, and drive retention and engagement.