Founders hear ceaseless chatter about environmental, social, and governance (ESG) and impact from investors, employees, and fellow entrepreneurs–but it’s hard to decide what’s hype and what’s necessary. Why should founders spend what precious time they have to better understand these topics?
Concepts such as ESG and impact can help companies recruit and retain better talent, access larger and more readily available pools of capital, and forge valuable inroads to those enterprise customers who are desperately trying to keep pace with commitments, mandates, and regulation.
Both startup founders and investors benefit when a company takes the time to put this all together: identify the positive change an organization can drive in the world, quantify it, and communicate it–while simultaneously working to create a culture of integrity, sustainability, and diversity within the organization.
When these foundations are in place, and a company’s not leaning too hard into being something that their scale just simply can’t allow for yet, more productive, world-changing ideas can be identified, funded, and built as the durable businesses our future needs.
Impact v. ESG
Impact is what a company does–its core product or offering. If the very existence of a business provides some inherent value for society, then they’re delivering Impact. For example, when a business is working on advanced carbon capture technology, educational services for underserved communities, or breakthrough cancer treatments.
ESG is how a company operates. If a company’s actions demonstrate a commitment to being a steward of industry and equal opportunity while not destroying our planet as a result, they are practicing ESG. For example, how they source energy, manage their supply chain, the diversity of their employee base, and the ethical governance of their operations.
These strategies are totally separate–but often conflated. Salesforce has strong ESG performance (Trillion Trees Initiative), but low Impact (CRM alone will not save the world). Tesla on the other hand has moderate ESG performance (ranked 61st in the industry and often dinged for labor and governance issues), but has a high Impact (scaling EVs and renewable power).
The question to ask is which is most relevant for a given business.
Large corporations like Google, Microsoft, Walmart, and Amazon have immense scale and nearly limitless balance sheets. They are able to leverage their size and influence in order to drive positive change outside of their core business (ESG). Google can influence public utilities to add more renewable power. Amazon and Microsoft can pledge billions of dollars for climate innovation funds. And Walmart can push its supply chain towards more equitable and sustainable practices.
Young companies, like the ones that we invest in at R7 in most cases, cannot…yet. As a small team trying to get a company off the ground, startups do not have the same luxuries as large corporations. For that reason, a focus on ESG reporting at the early stages of company growth may be more distraction than benefit. What a company should do, however, is work to instill the principles of environmental and social responsibility in their culture as early as possible. As a company scales, its culture will build momentum. If they value diversity, inclusion, and sustainability in the early days, it will pay dividends down the road.
On the other hand, while these companies may not have the scale of an Amazon or a Walmart just yet, startups have something that the Fortune 500 do not: the ability to choose what problems to go after. The large battleships that make up corporate America are not agile enough to pivot toward society's most important problems. But as startups, choosing focus areas is far easier.
Impact as a growth lever
Founders with a big vision and a burning desire to solve large, societal problems should ensure they’re leveraging this mission to help their businesses.
Impact can be a powerful tool for recruiting, fundraising, and sales. But first, a leader must quantify and communicate the positive change the organization is creating in the world. There are many frameworks to do this (IRIS being the most widely accepted), but keep things simple:
- Determine which of the UN Sustainable Development Goals are most relevant to the business.
- Quantify the negative consequences of today’s status quo (emissions, health impacts, etc.)
- Quantify the “new normal” that would be created if the company’s product, service, or technology proliferated into the entire industry.
The difference between today’s status quo and tomorrow’s new normal is what R7 calls “total addressable impact.” Think of it as the impact equivalent of the total addressable market–the totality of positive change that a company can drive in the world.
Once Impact is quantified, it’s important to develop a narrative that becomes ingrained into the thousands of discussions teams have on a daily basis. People want to hear passion.
Will George is the principal at R7 Ventures.
The opinions expressed in Fortune.com commentary pieces are solely the views of their authors and do not necessarily reflect the opinions and beliefs of Fortune.
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