By Robin Saluoks, CEO & co-founder, eAgronom.
Sustainable investment is big news, with ESG-mandated assets projected to make up half of all professionally managed assets globally by 2024. Some see it as a fad. With 1% of the world’s population owning 38% of total wealth and the world facing climate catastrophe, it comes as no surprise that nearly 9 in 10 people globally strive for a more sustainable and equitable world. At the same time, momentum is building toward redrawing the guiding principles of politics and economics that have ruled us for so long.
With a strong current pushing the agenda forward, no company can afford to ignore building sustainability considerations at the heart of its business model. Whatever industry, whatever product or service is sold, it needs to be within a sustainable framework to attract future investment, partners and public support.
Defining The Perimeters
The wheels of change seem to move incredibly slowly when it comes to addressing climate change and social inequality. The truth is, unpacking and rewriting the rules of the game that have governed us for so long does feel like an insurmountable challenge. Nevertheless, the cogs are turning, and around the world, public and private institutions are mobilizing to define perimeters and build frameworks for what can and what cannot be considered a sustainable investment.
Here’s a brief overview of some of the most important initiatives of which startups need to be aware.
‘Do No Significant Harm’
The European Green Deal is probably the most high-profile initiative around. Its aim is for the European Union to become the world’s first “climate-neutral bloc” by 2050. The European Commission has already adopted a number of packages, including the EU Taxonomy Climate Delegated Act: a classification system that provides companies, investors and policymakers with clear definitions of what constitutes a sustainable investment within the EU.
A Corporate Sustainability Reporting Directive, which will make sustainability reporting by companies more consistent, is expected to be adopted toward the end of 2022, alongside a number of Delegated Acts focused on ensuring financial firms include sustainability in their procedures and investment advice to clients.
EU regulators have also introduced the principle of “Do No Significant Harm” to ensure that a focus on one particular environmental or social factor in the investment process does not ignore other important objectives.
Even if your business isn’t currently trading in the EU or doesn’t have any European partners, in today’s interconnected world, this situation could change very quickly. Given that we are living through a major turning point in history, it is advisable to be somewhat aware of policy developments in the biggest trading blocks as helpful guidance on which way the wind is blowing.
The Race To Net Zero
Away from the public sector, The Glasgow Financial Alliance for Net Zero is a membership organization made up of global financial institutions working together to achieve the UN-backed Race to Zero, which aims to halve global net-zero carbon emissions by 2030. The alliance already has 450 members representing more than $130 trillion in assets under management and advice. It focuses on three core areas: actionable, science-based transition planning for financial institutions; accelerating the deployment of capital to enable emerging markets and developing economies to decarbonize and prosper; and shaping ambitious public policies and regulations that enable the net-zero transition.
Despite some believing that a move to a green economy is unaffordable, the fact that big finance has now started to push the net-zero agenda is a sure sign of a conviction that there is money to be made. It also should give startups impetus to build their business on sustainable principles from the outset with more confidence. ESG reporting is an important part of that puzzle, and one that is providing a big headache for many companies. Incorporate it into your startup practices while you can so you don’t have that same headache down the line.
Zooming In On ESG Reporting
Until very recently, reporting environmental, social and governance initiatives was just a “nice to have” for companies. No longer. The U.K. has already made ESG reporting mandatory for all companies with over 500 staff. The EU is following suit, and the U.S. legislative machine is working toward the same goal.
With legislation focusing on larger organizations, this may not feel immediately relevant to small startups. However, this view is misleading for numerous reasons. Firstly, ESG reporting needs to include the impact of every facet of an organization’s operations, including its supply chain. This means if your small startup is unable to fulfill a corporate’s ESG criteria, there may not be a contract or contracts may be terminated.
In the same vein, many large organizations are understandably struggling to pull together a coherent strategy for ESG reporting due to the complexity of their corporate structures. Being a startup, even if not operating in the sustainability arena, now represents the best time to put in place an ESG strategy. By the time the company grows big enough, sustainability reporting is likely to be on par with financial reporting. Not only that, according to Gartner, Inc, 85% of investors already consider ESG factors in their investments, with the percentage likely to increase in the coming years as better frameworks fall into place.
Sustainable Business Needs To Become The Norm
There is no doubt we live in very messy times, where we are required to make urgent structural changes to long-established political, societal and economic frameworks, while grappling with wars, a cost of living crisis now impacting even rich economies, as well as an impending climate catastrophe. Yes, many investors may currently not have the necessary tools to make a comprehensive assessment of what constitutes a sustainable investment; however, they should be fully equipped over the next year or two. Therefore, any ambitious startup should put sustainability at the heart of their strategy or soon find investment and partnership opportunities few and far between.