ESG in Value Creation

ESG is an acronym used to consider matters affecting the relationship between a business and its stakeholders covering environmental concerns, social impact and governance. While the number of B Corp businesses (meeting certified high standards of social and environmental performance, transparency and accountability) is increasing, a wide reading of the press demonstrates that some regard ESG as ‘wokery’ and not relevant for business, and many hard pressed founders are inclined to park the issue for a later stage of development.

At a common sense level, ESG makes a lot of business sense in that:

  • Consumers are increasingly making preferences based on sustainability. A survey by Capgemini found that 79% of respondents expressed such a preference and the reputational damage to a brand for poor social or environmental standards has long been self-evident.
  • Employees are increasingly attracted to organisations and demonstrably go further  environmental, social employee welfare considerations. Good governance has always been attractive to employees.  A report by PwC noted that “86% of employees prefer to support or work for companies that care about the same issues they do”.

Investors are also aligned to the value of ESG, which is supported by analysis performed by Deloitte that showed that the higher a company’s ESG score, the bigger the “positive impact on revenue growth and overall company profitability.”

In addition  to new regulations increasing affecting ESG, many scale ups and SMEs will also be interested to find out that significant sums $100 trillion Assets Under Management have committed to the United Nations Principles for Responsible Investment and $130 trillion committed to a net zero target. A survey by Edelman Trust found that 88% of investors monitor ESG metrics to inform investment decisions. A report by Mergermarket states that “Globally, ESG assets are on course to surpass USD 53 trillion by 2025, more than a third of the USD 140.5 trillion in projected total global assets under management.” The same report goes on to report that 41% of respondents say that they have turned down at least one deal due to ESG concerns and in the UK all deal teams were aware of ESG considerations.

While some may believe the above reflect ‘Ivory Tower’ institutional investment activity, a report by the European Investment Fund found that one in two venture capital (‘VC’) fund managers had an explicit ESG policy already in place in their respective VC firms. Focused on the UK, the British Private Equity & Venture Capital Association (BCVA) is committed to supporting new zero and environmental concerns and you can read their statement here. For example, Venture Capitalist Par Equity will state “We care about ESG, and we want to work with management teams who wish to improve these aspects of their businesses” while private equity Livingbridge will proudly state:

“We believe everyone has a duty to look after our planet” 

“We believe diversity is essential to success”

“We believe access to education and continuous learning unlocks opportunities and reduces inequalities”

“We believe in creating a workplace that supports personal 48 fulfilment and wellbeing”

Even for earlier stage businesses, the UK Business Angels Association (‘UKBAA’) is actively promoting investment in startups helping to meet net zero and environmental targets and also suggests that its members help make immediate changes, longer-term invest in  technology businesses and disruptors that support decarbonisation and that business make a stand and sign pledges that have the potential to effect real change.

In our experience, context is critical as a business is unlikely to make any positive impact if it does not scale or survive. As businesses mature and seek later stage investments, it would be a mistake to miss out on investment due to ESG concerns as it would be due to data protection oversights. And as well as doing some good you could benefit from additional goodwill. 

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