Unlocking ESG Value for Startups and Venture Capital: A Practical Guide

Discover how startups and VCs can unlock value through early integration of Environmental, Social, and Governance (ESG) practices. This guide explores key steps for implementing ESG, including onboarding, continuous monitoring, and compliance with regulations like the EU Sustainable Finance Disclosure Regulation (SFDR). Learn from real-world examples, such as Kolors and Konfidens, and find out how aligning with ESG and SFDR can attract investors, meet regulatory demands, and drive sustainable growth.

Table of Contents

1. Why ESG Matters for Startups and VCs
2. How to Integrate ESG: A Step-by-Step Guide
   • Onboard ESG Early
   • Identify Material ESG Issues
   • Continuous Engagement and Monitoring
   • ESG Reporting and Governance
3. Concrete Example: Kolors and Amplifica Capital
4. Concrete Example: Konfidens
5. Frequently Asked Questions (FAQ)

Why ESG Matters for Startups and VCs

Startups, especially in their early stages, may see ESG as something to address later. However, early ESG adoption brings numerous benefits, including attracting investment, meeting regulatory requirements, and differentiating from competitors.

In particular, the EU's Sustainable Finance Disclosure Regulation (SFDR) is reshaping the investment landscape. VCs and financial institutions are required to assess and disclose the sustainability risks and impacts of their investments. This means that startups with strong ESG frameworks that align with SFDR requirements are more likely to attract investment from VCs and institutional investors who must meet these regulatory obligations. Also among VCs "Article 9" as a product classification for their funds have increasingly been used as a marketing tool, while most are still Article 8 with certain, but not all, investment strategies concentrating on environmental or social goals, provided the investment firms maintain strong governance practices.

Understanding and integrating SFDR-compliant ESG practices early can therefore give startups a competitive edge and help ensure long-term viability. By aligning with SFDR, startups also ensure that they meet the growing demand from investors for transparency on sustainability. This makes it easier for VCs with Article 8 or Article 9 funds to incorporate them into sustainable or impact-driven investment portfolios. Essentially this is a question of financed emissions too. Learn more about successful ESG adoption in companies by exploring the case study on Konfidens.

How to Integrate ESG: A Step-by-Step Guide

Onboard ESG Early

VCs can help startups establish an ESG foundation from the outset. Early onboarding helps startups integrate ESG into their DNA and prepare for future regulations like those discussed in Understanding Double Materiality in CSRD.

Identify Material ESG Issues

Startups need to focus on ESG issues most relevant to their industry. For example, tech companies might prioritize data security, while consumer-facing companies could focus on sustainable supply chains. Understanding how to reduce the carbon footprint of your marketing mix can serve as a helpful reference for material ESG issues.

Continuous Engagement and Monitoring

ESG is a long-term commitment that requires regular assessment while legislation on Green Claims or the EU Product Environmental Footprint (PEF) methodology continues to evolve. Tools and expert guidance can help.

ESG Reporting and Governance

Governance is key to ensuring that ESG remains a priority as a startup scales. Developing an ESG reporting structure that aligns with regulations like the EU SFDR not only helps attract sustainability-focused investors but also ensures compliance with emerging disclosure requirements. Under SFDR, companies need to report on how sustainability risks are integrated into their processes and how they manage adverse sustainability impacts. By implementing governance practices that prioritize transparency and SFDR-aligned disclosures, startups can position themselves to comply with future regulations and avoid potential fines or legal risks as they grow. This also supports continuous improvement of ESG strategies and helps VCs monitor the long-term sustainability of their investments. Companies should regularly report ESG metrics to communicate progress with stakeholders, such as by following the ESRS Standards Guide.

Example: Kolors and Amplifica Capital

One concrete example of how ESG can unlock value for startups is the case of Kolors, a Mexico-based smart-bus platform backed by Amplifica Capital. Kolors, one of Amplifica’s early investments, needed support to better communicate its environmental impact as it grew.

Amplifica Capital helped Kolors build a framework for measuring sustainability efforts, reporting the replacement of 200,000 car trips and reducing 10,000 tonnes of CO2 emissions. This transparency made Kolors more attractive to climate-conscious investors and unlocked new funding sources. For more on how businesses can adapt, explore this case study on embracing plant-based proteins.

Example: Konfidens

Konfidens, a software provider in the mental health sector, serves as another great example of early ESG integration I have been working with. Founded in 2020 and led by CEO Aleksander Erichsen, Konfidens made it their mission to incorporate carbon accounting, compensation projects, and ESG clauses into their business operations from the very beginning.

Background and Challenge

As part of their pre-seed funding round, Konfidens faced challenges in integrating carbon accounting, selecting reliable CO2 compensation projects, and developing flexible but impactful ESG strategies. They aimed to:

• Integrate carbon accounting in a cost-effective manner.
• Identify reliable compensation projects.
• Develop an ESG strategy without compromising future scalability.

Solutions

Konfidens partnered with Fiegenbaum Solutions to tackle these challenges:

• CO2 Footprint Calculation: Using the SME Climate Hub's carbon footprint calculator, Konfidens was able to establish a clear understanding of their emissions.
• Compensation Projects: After evaluating several compensation projects, Konfidens chose those verified by MRV 3rd-parties, such as Sylvera.
• ESG Policy: With guidance from Fiegenbaum Solutions, Konfidens adopted flexible ESG clauses that aligned with investor and regulatory expectations.

Results

• Informed Decisions: Konfidens made informed decisions on compensation projects that aligned with their sustainability goals.
• Enhanced ESG Framework: The development of a flexible ESG policy laid the foundation for a dynamic CO2 compensation approach.
• Empowerment through Knowledge: The collaborative effort between Konfidens and Fiegenbaum Solutions empowered both teams to pursue their Net Zero goals effectively.

By integrating these practices early, Konfidens set themselves up for sustainable growth, similar to other startups navigating the complexities of ESG and carbon accounting. Read the full Konfidens case study for more details.

Frequently Asked Questions (FAQ)

Q: What’s the best time for a startup to integrate ESG practices?

A: Ideally, ESG should be integrated as early as possible to embed sustainable practices into the company’s DNA. This approach helps attract investment and positions the company for long-term growth. To learn about integrating sustainability in business, check out implementing ESG criteria.

Q: How can VCs support their portfolio companies with ESG?

A: VCs can provide onboarding support, including helping companies create ESG frameworks, codes of conduct, and diversity strategies. They can also assist with ongoing support and KPI tracking. Take a look at the Green Claims Directive impact on companies for insight on marketing compliance.

Q: What are the key challenges startups face when adopting ESG practices?

A: Startups often struggle with understanding which ESG metrics are material and balancing limited resources. VCs play a critical role in providing the necessary tools and frameworks to help companies succeed. For further insights, check out how companies can reduce their CO2 footprint.

Q: How can adopting ESG practices enhance a startup's marketability?

A: ESG adoption not only helps with regulatory compliance but also creates differentiation in competitive markets. Startups that prioritize sustainability attract more investment, build customer loyalty, and develop more resilient business models. ESG integration showcases a startup’s commitment to long-term success and positive impact, making it a more attractive proposition for both investors and partners.