[The Viewpoint] Introducing ESG into the DNA of Indian Startups

With over 77,000 recognized startups in India in September 2022, even sky is not the limit for them, and they are thus the future of the people, the country and the planet at large.

As per the Economic Survey of 2021-22, India has the 3^rd largest startup ecosystem in the world after US and China. This means a large workforce and a larger impact on the environment and climate change of the country.

Surprisingly, only 7% of startups today have a net zero plan.

With limited awareness and insufficient resources, Indian startup founders and entrepreneurs continue to remain anxious about ESG (Environmental, Social and Governance) requirements being time-consuming and irrelevant for their early aged businesses.

Despite the global trend and the net zero goal of 2070, the Indian startup ecosystem in terms of sustainability initiatives is far behind and ESG-unready.

As per the Report on Readiness of Indian Industries towards climate change guidelines of COP26 published in April 2022 by Boston Consulting Group, about 51% of the organizations ranked pressure from stakeholders as a top reason to invest in sustainability initiatives.

In India, through the SEBI’s new regulation ESG or BRSR (Business Responsibility and Sustainability Reporting) disclosures have been made mandatory for the top 1000 listed companies in India from FY 2022-2023.

But does that mean that the other middle-sized companies, unicorns, startups and ventures be completely left out of the conversation when it comes to ESG?

But when most of them are often just trying to survive, would they even have the time to think about ESG?

A lesser-known fact however remains that having an advantage over larger companies with a smaller asset base and culture, it is comparatively much easier for startups to build it in a sustainable manner right from its inception and completely avoid the costs of rework later.

For an ESG driven startup, certain key issues such as waste management, packaging, pollution, employee welfare, gender parity, mental well-being, diverse boards etc. would all be addressed from its birth.

A positive contribution to the society by these disruptors would also attract investors as well as costumers.

One of the hottest trends in the world of investing today is ESG investing. Therefore, angel investors search for sustainably sound and forward-thinking companies to invest in.

With the recent drastic shift in the consumer behavior towards sustainable products, what needs to also change is these scalable innovators move forward and meet their consumer demands.

In a recent survey conducted by DBS and Bloomberg Media Studios in August found that 92% of Indian SME business leaders in the survey stated ESG is a high priority for their business compared to 83% across Asia.

The innumerable and unthinkable benefits of thinking and acting on ESG in a proactive manner surpasses the time, energy or cost that would be incurred by the entrepreneurs. Implementing and promoting ESG is highly critical for startups that want to be successful and want to cultivate a high and loyal customer base.  

Targets on controlling the carbon footprint, reducing plastic waste, controlling air pollution, effective waste management, ensuring efficient energy consumption, using eco-friendly materials etc.

When a startup is focused on mobility, electric vehicle, e-commerce, B2B, they invariably deal with multi-facet environmental indicators for example, waste disposal, handling of plastics, packaging, reducing carbon footprints, reducing fossil fuel on our city networks, hazardous waste and many other such aspects which can be initiated in an environmentally responsible manner from the inception of the company and miserable documented advantages to the planet can be captured by the startup to create a robust environmental awareness within the ecosystem.

On the social or the ‘S’ front of ESG, from retention of employees to ensuring their well-being both mental and physical, startups are pushing for their survival. 40% of the workforce today is complaining of burnout and other health challenges.

Being considered amongst the biggest employment generators in the Indian economy, a huge responsibility is being cast upon these new aged startups for creating a comfortable working culture for their employees.

Social inclusion, addressing gender diversity issues, creating and ensuring good community relations, creating welfare policies, ensuring equal opportunities and fair wages boosts employee morale and helps in maintaining a good working environment and a healthy startup.

On the governance or the ‘G’ aspect, the company or the startup would have to show how transparent they are and how they comply with regulations and ethical standards. Developing clear ethics policies and effective dealing with issues including but not limited to complaints related to harassment or bullying would help a startup to build and grow.

Combining the three aspects, would generate a high ESG score which would thus provide an added advantage to the startups to attract better funds, customers and other stakeholders and will help accelerate their growth.

Obviously, issues and priorities would vary with the kind of business and industry of each startup and the stage your startup is in. The key would be to identify the material issues and develop policies and practices around them.

For example,

The misconception of treating ESG as an additional cost thus needs to be addressed as it not only helps to build a strong reputation, but also helps in attracting capital.

In the absence of a standard reporting framework, startups and unicorns should try and create their own system of transparency and report on how these sensitive ESG issues are being dealt with them and zoom in on their independent ESG reporting. One way would be to create an annual ESG report for their organization which would highlight and include all initiatives and steps taken to address such issues.

Infact, Trust Legal in 2021 alone pioneered one of the first ESG reports for a large private University which was primarily initiated to capture all the regulatory, environmental compliances. However, eventually it became a far more inclusive report which detailed water usage, social linkages with nearby villages, waste disposal, food wastage, gender equity, number of flora and fauna, visit of migratory birds within the campus etc.

Many startups which eventually will become global unicorns from India have repeatedly enquired from us about the methods of annual ESG reporting for them to capture their carbon footprints, their challenges with packaging, rules with regard to plastic usage and vehicular pollution.

Hence, changing the mindset on the way of doing business, and demonstrating your commitment through ESG reporting, prioritizing sustainability needs to become the norm for sustainable business.

According to the 2022 Oracle ESG Global ‘No Planet B study’ 93% of the Indian respondents believed that it is not enough for companies to declare or disclose their ESG policies but they wanted to see the actions taken.

Taking small steps for launching their ESG journey may include strengthening governance processes, ensuring diversity, improving waste management, water management, energy efficiency, accurate reporting etc.

There are many startups which are bootstrapped and struggle on regulatory, compliance, legal and accountancy bottlenecks. Primarily a startup puts all its energy in redefining the product and how it is disruptive, and all its finances are dedicated to creating the differentiation and eventually a market. You can cut cost by not engaging established law firms, multinational audit firms. However, documenting and embracing the essence of ESG is neither financially challenging nor it consumes enormous time of the founders and entrepreneurs.

One question the small companies and startups should be asked is that- Do you want to embrace the movement proactively and shape it according to yourself and lead the way or wait until others drive you and you are forced to follow their way as per the market compulsions?

Sudhir Mishra is the Founder & Managing Partner and Simran Gupta is an Associate at Trust Legal.