Designing
New Context
Designing
New Context
2024.05.23
In the current Anthropocene epoch of climate change, energy issues, and many other difficult challenges, the importance of the environmental, social, and governance (ESG) framework that aims to solve social issues through business has been significantly growing. Along with major corporations, startups are also expected to implement ESG management in recent years.
What ESG management is required for startups today? How does it differ from corporate social responsibility (CSR), green companies, or the Sustainable Development Goals (SDGs)? This article summarizes the ESG knowledge that entrepreneurs should be aware today, based on the expertise of Digital Garage’s (DG) Open Network Lab (Onlab), the investor and incubator of startups.
“ESG” refers to investment, management, and business activities related to environmental, social, and governance factors. Although ESG does share some commonalities with SDGs and CSR, these concepts have totally different perspectives and backgrounds.
First, let us compare the SDGs and ESG. SDGs are global indicators (objectives), while ESG activities are conducted to achieve them (methods).
People often confuse CSR and ESG. They are similar in a concept that involves management decisions for stakeholders (consumers, business partners, local communities, social environments, etc.) that are affected by environmental and social issues. However, while ESG plays a core role in management, CSR is not regarded as a central factor for these.
To understand the three concepts, we must look at the fundamental corporate stance of each. With CSR, the company does business assuming that such ongoing business causes negative impacts on the environment and society. CSR can be a means of providing compensation to society for these impacts. The company has a social responsibility to return part of its profits back to society by sponsoring arts, cultural activities, and environmental conservation activities like planting trees and cleaning up beaches. ESG is different because the company strives to solve environmental and social issues through its main businesses while also making a profit from such business.
Many entrepreneurs believe they should focus on scaling up as a startup exit strategy. However, a global movement of ESG management for startups has already begun. Next, we will explain why startups require ESG management from three different angles, based on knowledge shared by Sera Tsutsumi, a manager responsible for ESG in Digital Garage’s Onlab.
For a long time, people have described the current era using the term “VUCA,” which stands for “volatility, uncertainty, complexity, and ambiguity.” In recent years, this has been symbolized by countless events, including the COVID-19 pandemic, unprecedented disasters, global heating, the Russia-Ukraine war, subsequent raw material cost increases, and the rapidly depreciating yen.
It is certainly no easy task for Japanese and foreign companies to make decisions while referring solely to financial indicators about corporate value, such as performance and sales. Some examples include changing ways of working during the pandemic; business continuity after earthquakes, typhoons, and other natural disasters; and supply chain management during the war in Ukraine. It makes sense that non-financial information including governance structures and contributions to local communities has been an important factor.
For startups targeting IPO, good working environments and governance structures (the S and G in “ESG”) are required for listing. They must make gradual efforts even before starting full-scale listing preparations because these initiatives must be carried out over the medium and long term.
A recent trend can be seen in which institutional investors require venture capital companies and funds to carry out ESG initiatives. Naturally, the same also applies to startups.
For example, the Japan Impact-driven Financing Initiative is a consortium founded in 2021 that is centered on multiple Japanese financial institutions. It is a group of people that promotes impact investment which measures investees’ environmental and social impacts and makes investment and lending decisions based on such impacts.
It is likely that this movement picks up speed along with major changes in investment and funding methods, from negative screening (not investing in companies that harm the environment or society) to positive screening (purposefully choosing companies that make positive impacts).
In other words, we can say that ESG enables startups to access more funding, take advantage of good opportunities, and avoid opportunity loss.
Have you heard that young people have a different definition of what makes a job “cool?” For Generation Z who learns about the 17 SDGs in school, business that makes positive impact on society and environment is considered as “cool”.
Perhaps some readers may find it difficult to define jobs as “cool” in such a qualitative measurement. However, it is certainly an important factor in engagement and motivation among young employees who will change the future. There is already a trend of talented students purposefully choosing ESG companies.
Based on this global trend, we see many “ESG startups” that are focusing on the ESG perspective as a core of their businesses. To end this article, we will introduce a few of these leading ESG startups from three different angles.
1) Circular Economy
2) Fintech
3) Next-generation Mobility as a Service (MaaS)
Circular Economy is the sector that provides collecting tools and recycling solutions to effectively utilize products and to reduce waste and pollution. It often gathers and analyzes environmental impact data from product manufacturing, use, and disposal processes to create such a cycle.
The subcategories include recycling, upcycling, bioremediation (a sector that uses microorganisms and chemical substances in plants to break down waste matter), and negative impact reduction (a sector that conducts our economic activities with less harm to the environment and society).
EcoCart provides a carbon offset tool that calculates the amount of CO2 produced during product manufacturing, distribution, and shipping, then encourages customers to purchase verified carbon credits based on the emission amount. When a website implements EcoCart, CO2 emissions are automatically displayed when adding a product to the cart. The consumer is asked to confirm if they want to donate money to offset their carbon. An alert shows up to make sure the customer engages.
EcoCart estimates that 25% of users decide to pay the additional amount for offsetting carbon due to its carbon visualization function. This also provides branding effects to e-commerce shoppers who are active in tackling environmental issues. According to EcoCart, its tool increases the repeat purchase rate by 15% and the conversion rate by 14%.
https://ecocart.io/
In the finance sector, more companies are taking active steps to promote ESG-related financial products and to provide financial products and services that help solve economic disparities. Institutional investors (financial institutions, insurance companies, and other investors) are actively setting budgets for proactive investment in the ESG sector these days.
In response to the increasing demands of corporate disclosure and behavioral change among individuals, solutions that measure sustainability actions for both companies and individuals are expected to grow more. It is also expected that Financial products that utilize such data will be developed accordingly.
This pioneering Dutch challenger bank is a greener online neobank. It plants one mangrove tree for each 100 euros spent with Bunq credit cards.
Bunq also offers 2% cashback on environmentally friendly services and products such as public transportation. Based on Bunq’s data, carbon footprints can be calculated for products and services in each payment category, allowing users to offset their CO2 emissions from economic activities.
https://www.bunq.com/
MaaS companies develop and manufacture environmentally friendly electric vehicles (EVs), personal mobility products, and smart mobility products. In addition, they often provide comprehensive services such as developing alternative fuels that do not emit CO2 and software that cuts energy consumption, as well as providing conscious travel, a type of sustainable tourism that protects local cultures and environments.
A law has been enacted in California, US requiring companies that offer MaaS services to utilize eco-friendly vehicles. In Japan, recent overtourism has negatively affected the sustainability of the environment, culture, and limited resources. Companies are planning tours that reduce CO2 emissions, avoid global warming, protect biodiversity, develop regional communities, and/or target minority travelers. As Japan experiences rapid population aging, it is expected that MaaS services will help increasing the QOL for elderly persons and those with physical disabilities.
eMoBi operates a rental service for electric tuk-tuks, which hold three passengers, in Kamakura, Okinawa, and other locations. Its three-wheelers can be charged in home outlets. eMoBi is also working with governments on proof-of-concept for vehicles with IoT devices and digital signage. eMoBi is one of our Onlab alumni.
https://www.emobi.co.jp/
Led by ESG-focused funds and accelerator programs, the mindset toward ESG management among startups has been changing. Meanwhile, there are many startups that are interested in ESG initiatives without knowing what to do or what not to do. Some are struggling with how to prioritize ESG initiatives over product development.
With its profound understanding of the particular difficulties that startups experience in ESG management, Onlab supports ESG initiatives according to each company’s level of comprehension and current situation. Such hands-on support includes ESG Management 101 lecture with the goal of setting missions, visions, values, materiality, and governance structures.
Onlab takes questions and provides consultations about ESG businesses and funding. It hopes startups reach out if they are not sure what to do first, or if they wish to receive support from Onlab.
Onlab has declared, “In this time of rapid changes, we believe that our role is not only to promote the growth of startups from a business perspective but also to ensure that the companies we support contribute to society.” Going forward, it will provide more support to increase the number of impactful startups that solve social issues through their businesses.
Onlab ESG is committed to supporting startups that address important social issues. In addition to the 10+ years of entrepreneurial support through DG’s accelerator programs, we actively nurture the social implementation of startup businesses and services to be the first step in solving worldwide issues.
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