“The next 1,000 unicorns won’t be search engines or social media companies, they’ll be sustainable, scalable innovators — startups that help the world decarbonise and make the energy transition affordable for all consumers,” Larry Fink, chairman and CEO of US-based multinational investment management corporation BlackRock said in his annual letter to CEOs in January this year.

 

While companies in the developed economies have been focusing more on environment, social, and corporate governance (ESG), for their Indian counterparts it’s for long been an exercise-driven largely by the pressure from investors and the need to maintain their brand image.

 

As per US-based management consulting firm Boston Consulting Group’s Report on Readiness of Indian Industries towards Climate Change Guidelines of COP26, which was published in April this year, organisations were adopting sustainable business practices for select reasons including brand image, growth, and pressure from investors and stakeholders such as rating agencies, customers, employees and so on.

 

“About 51% of the organisations ranked pressure from stakeholders as one of their top reasons to invest in sustainability initiatives, especially those focusing on ESG- based considerations,” it said.

 

Experts point out that around 25 countries have made ESG disclosures mandatory and that number is only going to grow in the coming years. In India, the top 1,000 listed companies (by market capitalisation) have to mandatorily file Business Responsibility and Sustainability Report (BRSR) from the current financial year.

 

Reporting ESG performance by large companies is likely to have a trickle-down effect on the entire business ecosystem.

And startups, too, are feeling the heat.

 

Sanjeev Kumar Singhal, chairman, the Sustainability Reporting Standards Board, set up by the Institute of Chartered Accountants of India (ICAI), points out that ESG has become imperative to the success of any business.

 

“BRSR or ESG parameters would become the norm of the day for all businesses. A high score on ESG norms will give an added advantage to startups and they will be able to attract better talent and funds,” he says.

 

To be sure, private-equity (PE) investors regularly undertake pre and post- investment checks on ESG performance in startups.

Satish Ramchandani, co-founder, Updapt, an ESG-tech firm that otters ESG as a SaaS-based solution, points out that several of its clients are startups. “There is no escape from ESG. The venture capital (VC) community in India, too, is catching up” he says.

 

BRSR is likely to become mandatory for all listed companies in the near future and is a key action point for India to reach the net-zero goal by 2070. “Startups, too, would be part of this ecosystem when they want to get listed on stock exchanges or to be supply-chain partners with corporates that are either large or listed,” adds Ramchandani.

 

Rajesh K, chief quality and sustainability officer at direct-to-consumer meat brand Licious believes that while investors have started to look at companies through the ESG lens, it is more an assessment of the business to ensure the long-term sustainability and resilience to uncertainties and risks arising due to various aspects of ESG.

 

“We are living in a world where climate action and sustainability issues are imminent and all stakeholders expect businesses to be responsible in carrying out the business objectives considering needs of our future generations.” he savs.

 

N Chandrasekhar, founder, Jivoule Biofuels, a Hyderabad-based biodiesel production startup, points out that already there is a perceptible change in the attitude of investors towards ESG performance in investee companies. “Investors are very particular on ESG progress, especially after investment”.

 

Investors demand transparency, right metrics reporting, and the measurement of impact-generated, among other things. “No greenwashing practices are tolerated,” he adds.

 

However, most challenges faced by startups in meeting ESG parameters arise from the lack of awareness of their ESG impact, say experts.

 

Chandrasekhar adds that resource constraints add to their challenges in meeting ESG performance expectations.

 

Just as how investors help startups bring in corporate governance, they also help set standards (both internally and externally) to ESG reporting, which automatically orients startups in that direction. However, startup founders point out that ESG compliance is expensive and funds diverted for the same would add to financial burden.

 

“It needs prior planning and is a part of the culture,” says Tarun Jami, founder of climate-tech startup Green Jams.

 

The ESG myth

Most startups operate on the philosophy of‘hyper-growth’, which means they dedicate all their resources to acquiring customers. In most cases, this means sacrificing early profits to control market share and make super-normal profits in the future.

 

“Hence, some startups treat ESG as an additional cost. However, it is a misconception,” says Sandeep Kumar Mohanty, partner, ESG Strategy and Net- Zero at global consulting firm PwC.

 

Mohanty points out that ESG is not about investing money and time to manage compliance. “It is more about changing our mindset and how we do business.”

 

Experts point out that ESG-focused startups have stood out of late. They have attracted investors at a better capital cost and accelerated sales while optimising the use of resources. They also continue to attract young talent.

 

Mainstreaming ESG

VCs could play a key role in mainstreaming ESG in the Indian startup ecosystem. In Europe and the US, the VC community has been ahead of the curve in terms of sensitising startups about ESG issues.

 

“However we don’t find enough conversations of this kind happening in India,” says Timothy Hendrix, general partner at San Francisco-based early-stage VC firm Agility Ventures, adding that investors have been telling large companies to invest in ESG to bring more transparency and accountability in their business.

 

“We are now asking the businesses at the startup stage to do so from the beginning so that they can be both — have a growth mindset and be sustainable at the same time,” says Hendrix.

 

Jami, meanwhile, points out that considering how most VCs were predominantly tech investors, it takes a lot of grit to come out of their comfort zones to relearn, recalculate and re-evaluate their investment theses based on ESG parameters. It is now time for the founders to bite the bullet.

 

Startups can begin their sustainability journey in a small way, says Ramchandani…

 

"BRSR or ESG parameters would become the norm of the day for all businesses. A high score on ESG norms will give an added advantage to startuJ2S and they will be able to attract better talent and funds.
— Sanjeev Kumar Singhal, Chairman, Sustainability Reporting Standards Board

 

VCs on the boards of startups are in a good position to influence their thought process to achieve growth in a sustainable manner. However, for any ESG-focussed startup to attract the attention of VCs, they have to meet the acid test of financial viability, says Viney Sawhney, a professor at the Harvard University. Sawhney and Hendrix were recently in India to conduct a workshop on VC and ESG investing for startups, along with New Delhi-based Teri School of Advanced Studies.

 

Sawhney’s observations were that the failure risk of ESG-related ventures is low. However, most startup founders in India are still weaned towards retail, SaaS, and e-commerce ventures which have high failure rates. As a result, the pipeline for ESG ventures is not enough. “There is a lack of high-quality deal flow in ESG,” he adds.

 

However, given the agriculture and climate-related issues faced in India, there is a huge opportunity for ESG ventures to deliver an internal rate of return (IRR) in the range of 15% to 20%. That level of IRR is necessary for VCs to get interested in such ventures. To deliver such levels of IRR, the projects have to be well thought through, funded, and executed, he says.

 

Sawhney is of the view that lack of awareness among entrepreneurs is one of the key reasons for the dearth of high-quality ESG ventures in India. “In the US, when someone wants to start up, they first join a course to get a better understanding of the business ecosystem and the do’s and don’ts that they should be mindful of. In India, there are hardly any courses that give entrepreneurs such in-depth knowledge,” he adds.

 

The government, too, needs to play a significant role in propagating ESG practices among the startup ecosystem, says Sawhney.
 

“If India wants to mainstream ESG, startups and VCs have to play a key role,” he concludes.

See Source

---