ESG Metrics and Legal Realities: A Dual Foundation for Startup Investability

 

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1. Addressing your startup’s approach to ESG metrics

The concept of ESG metrics is an acronym consisting of three equal parts:

- Environmental
- Social
- Governance

Each of these has its own significance and makes up a huge portion of the overall score.

Environmental metrics

Regarding environmental metrics, you need to prove that your enterprise has a low carbon footprint (as low as it gets without disturbing your enterprise’s functionality). That you’re energy efficient and that you recycle and dispose of excess materials as efficiently as possible.

The investors are not just interested in the hardware used but also in the practices and analytics that can guarantee that the enterprise's environmental impact is minimal. Clean energy and electric vehicles are one such practice, but you need to address two issues to persuade your investors.

You need to show your commitment to the ESG metrics and legal compliances and demonstrate that you can do this while remaining in the green (from the financial standpoint). This means employing practices like battery analytics not just to increase the efficiency of your electric fleets but also to get some reports that you can use as proof that you’ve achieved both of these objectives.

There are two big reasons why all of this matters so much.

First, you need to understand that these “green” rules and regulations get stricter and stricter year in and year out. By taking a preemptive step to go greener, you’ll reassure your stakeholders that, even if the regulations get stricter, you won’t struggle to adjust - you’ll already be past the next goalpost.

Second, it will demonstrate that you are concerned with the ethics behind the process (that you’re not just results-driven). Chasing results usually makes enterprises underperform (as counter-intuitive as this may sound to you at the moment).

Social metrics

Social metrics affect the diversity and inclusion of your company. Diversity and inclusion are incredibly important, and you need to find a way to include them at every level of your enterprise.

Everyone needs to feel like their voice can be heard in your enterprise. Even more importantly, this will affect their ability to relate to your enterprise more strongly.

Pay attention to the well-being of your employees. Remember that you’re not just trying to tick off some box or boost a random vanity metric. You want them to feel good and be satisfied with your workplace culture. This way, they’ll show higher engagement and be much more dedicated to their work.

Ultimately, don’t forget about the importance of engaging with the local community. Sponsored events are more than just a networking opportunity. They’re a way to show that you really care.

For any interested investor, this will demonstrate that you plan to stay in this field long-term. None of these methods are aimed at quick profits but laying the foundations for long-term success.

Governance metrics

How do you determine the governance of your startup early on? You need to thread a thin line between undervaluing/overvaluing your notes and running transparent financial practices (in agreement with ESG metrics and legal realities). This is where the benefits of convertible notes for startups come to the forefront. As less formal but still binding, they allow for a simple fundraising process and minimize potential legal complexities.

There’s a reason why investors are so interested in governance. Namely, this is one of the most important anti-corruption measures and how you prevent unethical behavior. With a reduced risk of corruption and a higher commitment to ethical business conduct, investors will have a much easier time trusting you as a brand.

You also need to reconsider your board structure and ensure that everyone gets a fair representation within your enterprise.

2. Keeping an eye on legal realities

Staying compliant in the digital era is much harder than it seems.

Challenges are numerous, and they keep getting more numerous by the hour. This is why every startup looking to set solid foundations and reaffirm the trust of their investors needs a way to approach this delicate matter.

Intellectual property

First of all, there’s the issue of intellectual property. People without much experience in the field assume that intellectual property comes down to patents, but here’s much more than just that. Even a business model can be subject to intellectual property, not to mention trademarks and copyrights.

This is one of the reasons every small enterprise needs to start its journey in the business world by making a robust IP strategy. They need to file for necessary protections and, when they do look for professional help, look for someone who has experience in this field.

This will automatically make you more appealing to potential investors since they’ll have an easier time understanding what you’re bringing to the table (as well as that it’s actually yours to bring).

Data privacy and security

Another issue worth addressing is the increasing reliance on data-driven technologies. The data you collect usually belongs to your users, meaning you’re responsible for keeping it private.

The simplest way to approach this issue is to start by checking what kind of privacy regulation you’re under. You may be under the jurisdiction of GDPR or CCPA. Now, keep in mind that even if you are not from these regions, as long as you do business with entities from the regions in question (EU or California in these two cases), you’re under their jurisdiction.

Transparency is only possible if you’re doing everything by the books, and it’s something that both your users/customers and your investors/partners will know to appreciate. Still, staying on track can be quite a challenge, and you need to take it as seriously as you can.

Cybersecurity threats

Even if it’s not your direct negligence but a cybersecurity breach, you may still be responsible.

You must protect your business from cybersecurity threats like hacking, data breaches, and ransomware attacks. This will lead to a financial loss and a reputation loss, which, although harder to quantify, can be even more devastating for the longevity of your enterprise.

Always have these security measures in action, but also remember that things won’t always turn out for the best. An incident response plan is the best course of action in these scenarios. Remember, having a contingency plan doesn’t make you a pessimist. It makes you a realist.

3. Full benefits of dual-foundation

The bottom line is that you want to offer your investors the best of both worlds. On the one hand, you want to show them that you are not like other businesses - that you really do care. You want to show them that you care about the environment, your employees, and the community and have a decent representation on every level of your enterprise.

At the same time, you want to give them something even more concrete. While ESG metrics are metrics and are quite reliable, sometimes your investors will be interested in something a bit more concrete. At that point, you need to show them that you’re doing everything by the books. At that point, you need to reflect on legal realities and show them how and what you’re doing regarding local and industry-specific regulation.

The key thing you need to demonstrate is that you are fully committed to risk mitigation and that you represent an amazing long-term value for their money. This way, you’ll never struggle to boost the investability of your enterprise.

You need to give investors a reason to trust your startup

It takes time to build trust, but as a startup, you might need investments to start rolling in as soon as possible. So, you need to show them that you’re aware of the situation in the business world by performing admirably when it comes to ESG metrics, and making sure that you’re always on the right side of the law. This way, they’ll get all the reassurance they need.

By Srdjan Gombar

Veteran content writer, published author, and amateur boxer. Srdjan is a Bachelor of Arts in English Language & Literature and is passionate about technology, pop culture, and self-improvement. His free time he spends reading, watching movies, and playing Super Mario Bros. with his son.