ESG in Start-Ups
Impact investing, Ethical Investing, Responsible investing etc these are various labels that are used to describe investments that consider ESG issues. ESG focuses more on sustainable investing rather than on traditional socially responsible investing which was more closely associated to morally questionable issues. ESG investments are made with an intent to create a positive and measurable social, environmental impact along with maximisation of wealth for the shareholders and creating value for businesses. This type of investment focus has become very popular and universal prevailing not only in developing or emerging countries but also developed markets. Investors around the globe are progressively considering ESG issues to fundamentally analyse companies and integrate those into their investment portfolios comprising equity, debt, or direct investments in start-ups.
ESG/ Impact investments provides capital to sectors like sustainable agriculture, renewable energy, healthcare, medical care, education, micro-finance, conservation of resources, etc which play a significant role in addressing social and environmental challenges. Focus on ESG issues by investors is a long term investment approach. This kind of impact investing does not serve the normal investment criteria of high return on investments, financial incentives, becoming a unicorn or a high value company. But the focus here is on long term sustainability and returns are expected to occur over a long period of time. Thus, ESG investments do not fit well with short termism.
There are some barriers to adopting ESG approach. Investors argue that the monetary benefits of ESG cannot be easily identified and assigned to the assets for integrating them into portfolios. Companies are not well versed with ESG related issues and do not disclose related information fully and in a standard manner. Short term return requirements cannot be fulfilled as the focus is on long term sustainability.
Due to global pandemic there were many companies that struggled and went bankrupt or are on the verge of bankruptcies. Majority of ballooning start-ups which initially focused on high paper valuations and became unicorns by raising heavy financing, are now struggling to manage their liquidity and day to day operations. Looking at these companies, ESG financing is gaining more prominence. PE and VCs that have the long-term foresight have started to realise that this is the optimal time to make investments in ESG. Start-ups have also understood that raising capital by providing high paper valuations is not easy anymore.
Another reason for the ESG focused investments is the support of the governments. For example, Singapore Government is focused on food production to become self-reliance as it is considered to be the main pillars for security for the country. For India the focus is on increasing the standard of living of villagers and people of small cities through the use of technology. It is not necessary for the start-ups to focus on all the three pillars at the same time. They can start with social focus first and then gradually build up on environment and governance pillars.
Some of the prominent start-ups which have adopted one or more of the ESG pillars recently are Aspire, Zenyum, Surge, Blue Sky Analytics , Yours etc.
Written by: Dr Nisha Kohli
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