Introduction
Emerging with a strong emphasis on sustainability, carbon reduction, and better working conditions, a new breed of startups integrate these principles first in their companies. These startups—such as Pit-tastic, Tanki, and Urbee—are establishing innovative business models that benefit both their communities and the environment, offering solutions like plastic-free toilet paper and waste-free stores. A startup that prioritizes ESG and sustainability can nevertheless benefit greatly from implementing important Environmental, Social, and Governance principles, even if it is not exclusively focused on concerns like net-zero. ESG includes a company’s wider effects on its customers, workers, and the communities where it operates.
Why Should Unicorns Adopt ESG?
For unicorns, the imperative to adopt ESG strategies right now stems from several converging pressures highlighted in the current landscape. Investors are increasingly directing capital towards responsible investments and demanding transparency on non-financial performance, making tracking and reporting of fundamental ESG metrics a crucial factor for securing future funding and maintaining valuations. Investing in ESG is a smart move because a significant portion of millennial (97%) and Gen Z (99%) investors are interested in sustainable investing. They believe companies focused on ESG will perform better in the long run and are using their investment decisions to promote a more sustainable future.
Simultaneously, rising stakeholder expectations, particularly from influential demographics like Gen Z and millennials, necessitate strong ESG accountability to avoid reputational damage amplified by a few alternative ESG metrics, such as social media and traditional media. Furthermore, as large organizations push ESG compliance down their value chains, early adoption by unicorns becomes essential for future partnerships and acquisitions. By proactively integrating ESG into their core business strategy, unicorns not only mitigate immediate risks but also build stronger brands, attract top talent, and ensure long-term stability in an evolving business environment.
India’s startup ecosystem has seen a remarkable surge in ESG funds, with a fivefold increase over the past four years. According to Grand View Research, India’s ESG investing market reached USD 1.2 billion in 2024 and is forecasted to reach USD 4.1 billion by 2030. While large corporations worldwide have embraced ESG strategies, many startups, despite their inherent focus on social and environmental impact, are yet to fully integrate ESG into their business models. As stakeholders become more discerning and demand greater accountability, startups must increasingly prioritize ESG as part of their core strategy—to not only enhance their social and environmental impact but also to secure long-term business growth.
Advantages of an ESG-Focused Approach for Startups
- Startup Revenue: Focusing on consumers and the environment through ESG can enhance startup’s revenue by building a strong reputation and competitive advantage. An ESG-centric approach can boost brand awareness and attract customers. A 2024 survey of over 20,000 consumers across 31 countries found that 80% are willing to pay more for sustainable products, with some ready to pay an average of 9.7% extra for sustainably and responsibly sourced goods.
- Attracting Funding Through ESG: For startups seeking funding, a robust ESG plan can be a significant draw for investors. Increasingly, investors are attracted to companies demonstrating a long-term vision that incorporates sustainability. As environmental considerations become more prominent, many investors actively seek out businesses with a sustainability focus to align with growing consumer demand.
Why ESG goes Beyond being “Optional” and is Inevitable for Startup Resilience
- Investor Preferences: Investors are prioritizing responsible investments, and ESG factors are central to their decision-making processes. Startups adopting a formal ESG strategy attract investors by aligning with demand for sustainability, diversity, and ethical practices.
- Short-Term Valuation vs. Sustainable Growth: Prioritizing short-term valuation growth, such as aggressive scaling without a sustainable strategy, can be risky. This is where ESG comes into play – focusing on long-term sustainability. ESG-focused startups are better positioned to balance responsible growth with environmental stewardship and ethical practices helping build long-lasting businesses and avoid pitfalls of rapid scaling without a solid foundation.
- Positive Correlation with Financial Performance: A systematic literature review of studies up to September 2023 found that 50% of articles reported a positive impact of ESG on financial performance. This highlights a positive trend, linking ESG to improved financial metrics such as return on equity (ROE) and return on assets (ROA), suggesting that startups focusing on ESG are likely to experience tangible financial benefits essential for long-term success and growth.
- Risk Management: Startups that heavily rely on funding and continuously burn cash highlight the vulnerability of businesses lacking a strong financial framework. ESG practices help such startups proactively identify and manage various ESG risks thereby mitigating potential collapses when external conditions shift, such as funding drying up.
- Attracting Talent: For startups, a strong ESG framework emphasizing workplace ethics, diversity, sustainability, and transparency is key to differentiating themselves, attracting talent, and building a positive reputation and brand.
What are the Challenges for Unicorns to Adopt ESG?
- Defining a Comprehensive ESG Strategy: For startups, a key challenge is defining a comprehensive ESG strategy while juggling limited resources and rapid growth. This involves identifying which ESG factors are most relevant to their nascent business, setting meaningful yet achievable sustainability goals, and integrating these into their core business model from the outset. Startups often struggle to navigate the complex landscape of available sustainability reporting tools and select the right platform that fits their current stage and future ambitions.
- Implementing ESG Programs and Initiatives: Executing ESG programs requires coordinated effort, which can be difficult in lean startup environments. Startups often face hurdles in establishing clear governance for ESG, securing buy-in from busy leadership focused on immediate survival and growth, and allocating scarce resources to ESG projects amidst competing priorities. Determining which ESG initiatives will have the most significant impact can also be a challenge for startups with limited data and experience.
- Obtaining Dependable Data and Measurements: Startups often lack the infrastructure and processes to gather precise and reliable data for tracking ESG performance. They may struggle to identify relevant data sources, ensure data quality as they scale, and align their metrics with emerging ESG reporting standards. This lack of dependable data makes it difficult for startups to effectively measure their ESG progress and identify areas for improvement, hindering their ability to demonstrate their commitment to sustainability.
How NeoImpact Solves the Challenges for Startups to Embrace and Implement ESG Strategies
NeoImpact is a bespoke consulting platform and one-stop ESG intelligence platform that offers tailored ESG services designed to help startups embed sustainability into their operations from inception. As your ESG partner, we offer:
ESG Strategy Development
NeoImpact crafts customized sustainability strategies that directly align with your business goals. We work with you to identify the most relevant ESG factors for your startup and develop a clear roadmap for integration, ensuring your sustainability efforts drive real impact and support your growth.
ESG Data Management, Reporting, and Disclosure
We provide solutions for accurate ESG data collection, thorough analysis, and transparent reporting. We help you establish robust systems to track key metrics and prepare comprehensive reports that build trust with stakeholders and demonstrate your commitment to sustainability.
ESG Expert Training
We help to equip your team with the essential knowledge and skills for the effective implementation of ESG. Our expert training programs empower your employees to understand and contribute to your sustainability goals, fostering a culture of responsibility across your organization.
ESG Stakeholder Consultation
We facilitate meaningful engagement with your stakeholders on ESG matters. We help you understand their expectations and incorporate their feedback, building stronger relationships and ensuring your sustainability initiatives are relevant and impactful.
Conclusion
Incorporating ESG principles into startup strategies perfectly aligns with the need for sustainable growth, responsible scaling, and long-term business success. This proactive approach not only helps mitigate operational and reputational risks but also significantly attracts environmentally and socially conscious investors. Furthermore, a strong ESG framework cultivates a positive internal culture, boosting employee satisfaction and loyalty, while ensuring the business thrives ethically and responsibly in an ever-evolving market increasingly valuing sustainability. By focusing on ESG, startups can avoid the pitfalls of excessive focus on short-term valuations and instead build enduring, value-driven, and resilient businesses poised for lasting impact.
