Environmental, social, and corporate governance (ESG) is not a new topic in the European startup space — in fact, it’s been talked about and debated for years on end.
Yet, when you follow discussions and investment patterns closely and work with enough seed- and early-stage startups, it’s apparent that the topic of ESG is also riddled with misconceptions.
These are often perpetuated, shared, and fed by investors — and can be detrimental when digested by up-and-coming companies.
In these challenging economic times, it may be tempting to deprioritise areas like ESG. But, this is precisely when we need to dig our heels in and remind ourselves why ESG is vital for both immediate resilience and long-term progress. So, let the debunking begin.
Myth 1: ESG equals ‘impact investing’
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There is often confusion between ESG and impact, with the latter specifically referring to the environmental and social outcomes resulting from a company’s operations.
The most common objection we hear is that focusing only on “impact investments” limits investment opportunities and subsequent returns. While we believe impact investing will stay as a specialised asset class in the near future, ESG factors will eventually influence the practices of all investors.
Impact investing specifically seeks to generate measurable social or environmental benefits alongside financial returns, whereas ESG criteria are used to evaluate a company’s operational performance and risk management. ESG criteria apply to all industries and company stages, influencing decision-making and risk management across the board, allowing companies with strong ESG practices to perform better financially in the long term.
Moreover, with increasing regulations and disclosure requirements globally, ESG considerations are becoming mandatory for all investors, not just those focused on impact investing. There’s also increasing demand from consumers, employees, and other stakeholders for transparency and responsibility from companies, pushing ESG into mainstream investment strategies.
Myth 2: ESG is not relevant for seed and early-stage startups
This perception overlooks its critical role in laying a strong foundation for growth. By implementing ESG principles early on, startups can start laying a sustainable and ethical foundation to begin scaling their processes and their culture smoothly.
Setting the foundation proactively also avoids costs that could be realised later that may stem from crucial aspects like employee welfare, emissions control, supplier choices, raw materials sourcing, and data security.
In addition, a seed-stage investment decision is driven by skilled talent within the company, and startups that prioritise ESG are better positioned to attract and retain top talent, particularly among younger demographics who increasingly opt to work for responsible companies. Any logical investor should be able to appreciate such a startup’s foresight and risk management capabilities, and find the competitive market edge this brings hard to resist.
Myth: This is a ‘nice to have’ company aspect
Wrong again; it is, in fact, a must-have. As BlackRock’s Larry Fink put it, sustainability should not be focused on because one is an environmentalist, but because one is a capitalist. This requires understanding from investors on how their portfolio companies are adapting their respective operations to significant, existential economic changes related to sustainability – be it climate change, resource scarcity, and geopolitical unrest – that are underway.
The pressure is increasing from both the Limited Partners (LP) side, and through emerging regulations such as the Sustainable Finance Disclosure Regulation (SFDR) and Corporate Sustainability Reporting Directive (CSRD) which trickle down the value chain to smaller companies.
Many institutional investors, like pension funds and asset managers, now require robust ESG practices as part of their investment criteria. The European funding landscape is shifting towards supporting sustainable ventures, which means real, concrete proof points are demanded from companies that wish to raise follow-on funding.
Major gap in knowledge about ESG topics is fueling misconceptions
Currently, access to information and its ambiguity is a big challenge for startups; we need accessible processes and incentives. The solution is not for all investors to build their own ESG frameworks to report or support companies, but for there to be more concerted efforts.
Raising ESG issues, discussing them, and educating entrepreneurs will encourage and empower businesses. However, this, in turn, requires investors themselves to understand the weight of these issues for the success of good ventures and how these can be easily communicated to early-stage companies.
Ultimately, ESG will become a strategic imperative, essential for business to thrive in a sustainable and responsible manner. Without a functioning, resilient and fair planet, there will be nothing to invest in nor generate returns from to begin with.
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If you are looking for resources to help build your ESG strategy, consider starting with ESG for seed-stage startups – the first 3 steps to build a solid ESG strategy, Antler Sustainability toolkit, and Balderton ESG toolkit.
Pauliina Martikainen is partner at Maki.vc. From consumer applications to enterprise software, from artificial intelligence to health tech and commerce technologies, Pauliina’s investments have covered a range of categories. She has solid strategy and business management skills combined with a passion for finding creative ways to drive growth.
Mona Saurén is an analyst at Maki.vc and responsible for overseeing Maki’s ESG work. She supports Maki’s portfolio companies in every stage of their ESG journey, from forming policies to developing ESG strategy.
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