ESG (environmental, social, and governance) ratings are increasingly considered in investment risk. Trillions of dollars are being poured into technologies and systems that will help the US reach 100% renewable energy by 2050. Other countries are leagues ahead of the US on their just as ambitious climate goals. Even if your company wasn’t founded on the promise of a social mission, a triple bottom line framework is becoming the new normal.
For existing companies, the message grows louder: adapt or become a liability.
If you're starting a company today or have a relatively young company, you're in luck. You have the chance to filter your efforts through an ESG lens before you have deeply rooted systems in place.
This isn’t only about appeasing current trends or policies. It’s about avoiding ESG debt.
ESG debt is the accruing of practices that don’t consider long-term resilience or social repercussions. These practices might (read: will more than likely) jeopardize a company's bottom line in the future.
Similar to technical debt, which can slow down innovation in the long run by choosing the quick fix now, ESG debt can pile up when a quick return is favored over the positive societal impact of planning within an intentional time horizon.
Another type of comparable debt is organizational debt.
Startup guru Steve Blank says that organizational debt is like technical debt — but worse. He defines organizational debt as "all the people/culture compromises made to 'just get it done' in the early stages of a startup."
I’d take that one step further and say that ESG debt is the most complex debt a business could accrue.
Digging out of it doesn’t only require internal reorganization. It also requires rebuilding your reputation and relationships, which means marketing costs increase. Recruiting talent could also become an issue. A complete revaluation may be necessary for your practices to adhere to regulatory requirements.
Ignoring the dangers of ESG debt could lead to a full-on business identity crisis.
So, how do you avoid it?
In a perfect world, every startup would receive an ESG business manual. Since they don’t hand those out in startup school, here are the basics to get you started.
First, let’s break down the ABCs of ESG, and what each definition means in terms of building an ESG lens into your startup. Each of these factors influences your ESG rating, which determines the risk of investing in your company.
Environmental
If you're going to make decisions about where to locate your business or physical assets, geographically speaking, then you might want to take into consideration the future of a particular location. Lenders are already refusing to lend or have much higher interest rates for certain parts of the country, and insurers are refusing to insure assets in those areas too.
You also must consider the future environmental impact of your company, and your entire supply chain. Will you continue to use fossil fuels? What is your carbon footprint? Are your suppliers environmentally compliant? These will all be standard questions in the future and are increasingly common already.
Social
Questions about diversity and inclusion will be top of mind. How will this affect your hiring process, your leadership team, and employee retention? Your clients and your customers will be asking these questions of you and might make their buying decisions based on your company's social commitments.
Resiliency against the ever-changing tides of public opinion should also be considered. Can you still be successful if the trends you’re depending on shift? What will your response plan be? Being ready to pivot quickly is crucial.
Governance
Disregarding the importance of governance can undo all of your hard work in the blink of a data breach or leadership slip-up. Due diligence must be performed when considering who represents your company and who has decision-making power. This includes consideration of diversity and equity in the C-suite and board of directors.
Governance also boils down to the very essence of your company. As I so often ask guests on the Bigger Than Us podcast and my consulting clients, what’s your “why?” Get clear on and build systems to support your purpose.
Once you wrap your brain around the pillars of ESG and what they mean for your business, it’s time to put systems in place to ensure they’re fulfilled.
Develop a systematic approach to addressing all three areas of ESG and circulate the information with your entire team. Make your ESG plan available to new hires during the onboarding process, and review it regularly at board meetings.
Quarterly time horizons have their place, but they aren’t the right approach for every objective.
Michelle Green is the President of the Long Term Stock Exchange, a share-trading platform that rewards companies planning for the long-term. In Michelle’s interview on Bigger Than Us, she recommends asking “what do we identify as the long term? And what are the different time horizons that we use for different purposes?”
Once time horizons are defined, you can report on them individually and holistically.
I'm not sharing the idea of ESG debt with you to add one more to-do to your already long list of things to think about. I'm sharing it with you so that you're not attempting to undo company policies that you could have addressed today in five years.
Take the time today while your company is young to view it through the lens of ESG.
Remember, no company is immune to ESG debt. Making ESG a priority in your company today will save you from accruing one additional debt that you'll need to repay in the future.
