New report from ESG_VC and BVCA finds environmental agenda is lagging in startups

How the early-stage companies implement ESG within their work, and what are their strengths and weaknesses in this area, were just a few of the topics covered in the analyses conducted by ESG_VC and BVCA. The report titled “2023 Research and Trends – Turning Intention into Action” was created using the data provided by 450 startups backed by 16 venture capital firms including Lakestar, Baldeton, Molten Ventures, Highland, Beringea, and MMC.

The report highlighted some interesting findings, ultimately aiming to not only provide assistance to companies in achieving but also accelerating their progress in the domain of ESG application and implementation. When it comes to net zero challenges, the report details a slow but positive movement among startups. Positive signs can be seen in the measurement of carbon footprint(s) as well as the usage of carbon offset tools and initiatives.

However, ESG_VC and BVCA found that only a small portion of the companies offer staff codes of conduct and relevant training to support the responsible development of code as well as the use of AI systems.

Let's dive in.

1. Early-stage companies face challenges with the net zero agenda in the environmental realm

There is evident progress by startups when it comes to the environmental metrics and an encouraging statement of objectives:

• There is a growing minority of companies measuring their carbon footprint – the relative proportion of the companies has grown by 5% (from 11% in 2021 to 16% in 2022)
• There is a small level of growth (2%) within the companies that currently use offsetting tools or initiatives (from 9% in 2021 to 11% in 2022)
• Net zero strategy is lagging as companies skip implementation. Only 1 in 20 companies has a programme in place to achieve net zero carbon, which shows a drop of 2% compared to the previous year (from 7% in 2021 to 5% in 2022).

In order to improve the statistics, but more importantly, to raise the commitment regarding implementing ESG into the everyday work of the companies, it is important to set healthy targets on which the companies and investors need to focus. The report shows that for the next 12 months:

• 22% of companies plan to measure their carbon footprint;
• 20% plan to have a policy and program in place to achieve net zero carbon;
• 14% plan to use carbon offsetting tools and initiatives.

2. Leadership diversity remains an area of concern, even as startups demonstrate their dedication to staff wellbeing and commitment to diversity, equity, and inclusion (DEI)

Creating a supportive and inclusive environment for staff is one of the important goals for the companies included in the analysis. 

• 60% of the startups in 2022 reported that they have a policy or strategy to support staff with mental health and well-being, and a further 12% plan to have the same in 2023.
• 33% of startups reported that they provided DEI training in 2022, and an additional 23% plan to do the same in 2023.
• 39% of startups had a recruitment program in 2022 with the aim to reach people from diverse backgrounds, and an additional 8% are planning for 2023.
• But, even though many companies are creating the basis for long-term improvements regarding the DEI, there is a still need for greater support when it comes to gender diversity among senior leadership – 45% of the companies do not have female representatives on board, while 15% of startups do not have female representation within their senior management.

3. AI risks are developing despite robust policies which provide a framework for success

In the analysis of the governance metrics, the report showed the healthy adoption of key policies and a growing interest in embedding sustainability and ESG within corporate governance. Even though the results are encouraging, there are some questions that need to be considered when it comes to the technological risks:

• 21% of the companies in 2022 have adopted a formal ESG policy, which is a raise compared to 18% in 2021
• Also, there is an increase in the number of companies that are reporting sustainability as a regular item on their board agenda (19% in 2022, compared to 16% in 2021)
• That startups embrace corporate policies confirm the following: 80% of companies have a formal remote working policy, 63% have an anti-bribery and/or anti-corruption policy, 61% have a corporate code of ethics, and 48% have an anti-harassment policy in place.

Even technological risks are taking place and in some of the areas, like Artificial intelligence, they are becoming a growing area of concern for all participants in the market. The report highlights that a very small proportion of startups offer guidance on the use of AI, while many of them do not have sufficient training or controls in place when it comes to security:

• 21% of companies offer codes of conduct and relevant training on AI
• 30% of companies train their staff annually on cybersecurity
• 43% of start-ups have set up cybersecurity controls to monitor risks in their data infrastructure.

4. As companies scale, they increasingly embrace ESG practices, while SaaS demonstrates its strengths in social

An additional aspect of the analysis is the ESG performance between key sectors of the venture capital ecosystem, as well as the changing performance as companies scale.

Thus, the report shows that:

• There is an important difference between the performance of software-as-a-service (SaaS) companies (which represented 21% of businesses analysed in this year’s research) and other key sectors, such as fintech, e-commerce, and manufacturing.

• There is a clear progression as companies scale when it comes to cornerstone metrics like measuring carbon footprint or whether the companies have an ESG policy in place.

In order to provide support to the companies with the aim to accelerate their progress towards achieving ESG targets, ECG_VC provides free training and resources. The training covers all specialist topics like pay gap analysis, surveying for inclusion and diversity, carbon accounting, building responsible technology, net zero strategies, and life cycle analysis of products.

The full report is available here.