ESG Helps Emerging Companies Add Value and Reduce Risk

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Under the administration of President Biden, the SEC will probably consider requiring disclosures in several environmental, social, and governance (ESG) areas. Public companies in the United States may have to disclose data on specific climate-change risks, which are currently reported only voluntarily and often outside SEC filings.

As first appeared on Bloomberg Law.

Perkins Coie attorneys Kevin Feldis and Marcy Hupp explain how effective ESG plans give startup companies a competitive edge. This includes recruiting top talent, communicating priorities, and other factors that increase long-term value.

Growing companies face a multitude of demands, and some might prioritize developing an environmental, social, and governance strategy below other initiatives. However, creating an ESG plan is an effective way for emerging companies to gain a competitive advantage, attract talent, build resilience, reduce risk, and increase value.

Deciding what benefits of ESG your company seeks to achieve will also help the organization implement and more clearly define its corporate purpose. This is an achievement that eludes many well-meaning mature businesses, but will pay dividends by clearly guiding your organization in good decision-making for years to come.

Understanding ESG

ESG may mean different things to different businesses. But at its core it is a recognition that organizations are accountable for their environmental and social impacts, benefit from considering a broad range of stakeholders, and can build value and reduce risk by focusing on environmental, social, and good governance issues.

There are now many frameworks for an enterprise to map, measure, and report its ESG accomplishments—some more rigorous and instructive than others.

For growth-stage companies, or those newer to ESG, a better strategy may be to identify a smaller set of E, S, and G priorities that align with their individual corporate purpose. These priorities should also include an objective recognition of any industry-specific ESG impacts and challenges.

Knowing Your ESG Purpose

Renewable energy companies will likely have different ESG priorities than chip manufacturers or software companies based upon the nature of their business, environmental impacts, and global aspirations. But depending on their scope of operations and corporate purpose, among other factors, they may also have overlapping commitments to factors such as clean energy consumption, strong corporate ethics, and supply chain compliance.

If your corporate purpose is not clearly defined, now is the time to code it into your company’s DNA and build it into your initial ESG strategy.

Deciding whether your corporate purpose and underlying values include saving the planet–as embraced by Patagonia–or advancing workforce diversity–as emphasized by Salesforce–will help guide the organization’s decisions and reduce risk along the way. It will also help you develop your ESG story—what you believe and want the world to know about your ESG commitments and accomplishments.

Communicating your ESG priorities signals to investors, customers, and employees what the company cares about and where it is going. To fully incorporate an ESG strategy into the organization’s culture and decision-making framework, an emerging company should develop an ESG plan that documents its approach and support the plan with solid foundational policies. These include a code of conduct, including for suppliers, and a diversity, equity, and inclusion policy.

An ESG plan backed by concrete policies clearly communicates the company’s priorities to internal and external stakeholders and provides accountability to everyone in the organization. It also assures investors that you are building value and mitigating risk.

How to Win

Developing an ESG strategy early in the life of a company has many competitive advantages.

First, an ESG strategy can differentiate and define a company’s brand by highlighting that company’s product or service in the marketplace.

Second, an effective ESG strategy can help a company gather valuable information about everything from what customers and investors want to cost-saving energy efficiencies.

Third, many ESG issues are key to attracting and retaining top talent.

Fourth, an ESG strategy can help prepare for increasing reporting demands (voluntary and regulatory) and the real climate impacts heading our way.

Fifth, a company that implements an ESG strategy focused on diversity, as well as good governance and sound decision-making, is more resilient as it evolves.

Sixth, a growth-stage company with a transparent and focused ESG strategy will attract investors focusing on long-term value.

Finally, a strong ESG strategy recognizes that focusing on these issues not only is the right thing to do, but also increases value in the eyes of all stakeholders—and in so doing, increases the corporate bottom line.

Right-Size Your ESG Plan

When developing an initial ESG plan, keep it simple. It is better to start your ESG strategy in focused increments, setting clear and measurable ESG goals during your initial years of operations, rather than spend countless hours and energy taking on more than you can reasonably accomplish.

A right-sized ESG plan identifies specific ESG goals, consistently communicates those goals, and includes a plan to track progress. Leading with your purpose and dividing your plan into three ESG component parts is a great way to start. As the company grows, your ESG planning can grow with it. Most importantly, think big, but don’t overcommit or you risk claims of greenwashing.

The good news is that a right-sized ESG plan draws from existing company strengths and successes. Do you already research responsible suppliers? Do you offer training or career development opportunities to employees? Are you proud of your diverse board? Existing priorities like these can inform an initial ESG plan.

Finally, put your plan in writing and seek outside input and expertise to avoid missteps and make it shine.

Identifying an ESG strategy from the beginning that fits a company’s purposes can establish a framework for future decision-making and serve as a guiding star as the company grows. An emerging company with a clear ESG plan communicates its commitment to sustainable environmental impacts, recruiting and retaining top talent, and good corporate governance—all factors that contribute to long-term value.

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