By Robin Saluoks, CEO & Co-Founder, eAgronom†
Sustainable investing is big news, with ESG-mandated assets expected by 2024 make up half of all professionally managed assets worldwide† Some see it as a fad. Of 1% of the world’s population owns 38% of total wealth and the world facing a climate catastrophe, it is no surprise that almost 9 out of 10 people worldwide strive for a more sustainable and just world. At the same time, momentum is building toward redefining the guiding principles of politics and economics that have ruled us for so long.
With a strong current propelling the agenda forward, no company can afford to ignore sustainability considerations at the heart of its business model. Whatever industry, product or service is sold, it must fall 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 tackling climate change and social inequality. The truth is, unpacking and rewriting the rules of the game that have ruled us for so long feels 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 cannot be considered a sustainable investment.
Here’s a quick rundown of some of the key initiatives startups should be aware of.
‘Do no major damage’
The European Green Deal is probably the most high-profile initiative there is. The goal 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 Guidance is expected to be adopted by the end of 2022, which will make corporate sustainability reporting more consistent, in addition to a number of delegated acts aimed at ensuring that financial firms include sustainability in their procedures and investment advice to clients.
EU regulators have also introduced the “Do No Significant Harm” principle to ensure that a focus on a particular environmental or social factor in the investment process does not override other key objectives.
Even if your company is not currently trading in the EU or has no European partners, this situation can change very quickly in today’s interconnected world. Given that we are experiencing an important turning point in history, it is advisable to have some knowledge of policy developments in the largest trading blocs as a useful guide to how the wind is blowing.
The race to net zero
Outside of 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 emerging economies to decarbonise and prosper; and shaping ambitious government policies and regulations that enable the net-zero transition.
Despite some believing that a move to a green economy is prohibitive, the fact that the major financial world has now started pushing the net-zero agenda is a clear sign of the belief that there is money to be made. It should also give startups an impulse to build their business from the start with more confidence on sustainable principles. ESG reporting is an important part of that puzzle and is a major concern for many companies. Incorporate it into your startup practices while you can so you don’t get the same headaches down the line.
Zoom in on ESG reporting
Until recently, reporting environmental, social and governance initiatives was simply a “nice to have” for companies. No longer. The UK has already made ESG reporting mandatory for all companies with more than 500 employees. The EU is following suit and the US legislative machine is working towards the same goal.
With legislation aimed at larger organizations, this may not feel immediately relevant to small startups. However, this view is misleading for many reasons. First, ESG reporting must include the impact of every facet of an organization’s operations, including the supply chain. This means that if your small startup cannot meet a company’s ESG criteria, there may be no contract or contracts will be terminated.
In a similar vein, many large organizations understandably struggle to put together a coherent ESG reporting strategy due to the complexity of their corporate structures. Being a startup, even if it’s not in the field of sustainability, is now the best time to build an ESG strategy. By the time the company gets big enough, sustainability reporting will likely align with financial reporting. Not only that, according to Gartner, Inc, 85% of investors already consider ESG factors in their investmentswith the percentage likely to increase in the coming years as frameworks improve.
Sustainable entrepreneurship must become the norm
There is no doubt that we live in very chaotic times, in which we urgently need to implement structural changes in long-standing political, social and economic frameworks, as we grapple with wars, a cost of living crisis that is now affecting even rich economies, as well as an impending climate catastrophe. Yes, many investors may not currently have the necessary tools to make a comprehensive assessment of what constitutes a sustainable investment; however, they should be fully equipped for the next two years. Therefore, any ambitious start-up should put sustainability at the heart of their strategy or soon find few investment and collaboration opportunities.