The Founder’s Guide to ESG (Part I)

Environment Social and Governance (ESG) framework is relevant for a wide range of stakeholders - institutions, brands, rating agencies, investors, and even the government. It has its fair share of promoters and detractors, and is often misunderstood, or understood incompletely. In our view, it is important to measure and strengthen ESG indicators at a fundamental level for a company – whether a startup or a legacy business.

Given its increasing relevance to startups of all kinds, and the fact that investors are among the key drivers of ESG reporting, we thought it helpful to cover:

• A closer look at ESG framework
  
• How it benefits companies
• Inclusion of it for evaluating companies
• A simple assessment you can conduct for your own business
• Our learnings of past 3 years

The ESG framework

Simply put, ESG framework enables a holistic view of business operations to achieve positive externalities, and consistently reduce or mitigate the negative ones. These externalities can range from supply chain and sourcing like we are now seeing in the world of cocoa, all the way to post production management. Businesses, irrespective of sector, are leveraging ESG to define purpose, sustainability pathways, and responsible business practices.

Large conferences and conversations focus on sustainability issues, and boardroom conversations now regularly go beyond discussing profits alone: they also include efforts to achieving Net Zero, the practice of diversity and inclusion, and the adoption of an ethical supply chain. Take for instance, a large energy company like SAEL, which is staying away from projects located in the home of the Great Indian Bustard – due to ESG.

The benefits of ESG

Mukund Rajan’s Outlast describes the higher survivorship rates of sustainability funds over non-ESG vehicles – an impressive 77% as compared to 46%, within just a decade. The number of companies appointing Chief Sustainability Officers jumped threefold in 2021. 

High-purpose companies are more than twice as likely to rank in the top two quartiles of 10-year total shareholder return performance as their low-purpose peers. Top performers on ESG parameters can expect valuation multiples up to 19% higher than the rest. And Indian companies with high ESG ratings brought in 15% compound annual returns over the last decade, almost twice as much as those of companies rated low.

ESG at Fireside

At Fireside, ESG is more than just a framework. We are members of UNPRI, and thereby committed to the practice of responsible investing.

Despite being an early-stage investor, we have integrated ESG into our deal process. Not only do we articulate our approach in our ESG Policy, but we have also detailed a process that enables us to treat ESG as a profit tool, a scalability enabler, and an innovation engine. Our process is based on global ESG standards, with customisation to suit early-stage consumer brands.

Sourcing

ESG is used across the deal making process, with all formal documents including the term sheet, SHA&SSA, and IC note call out aspects of ESG. 

We commission a third party-led ESG Due Diligence which includes site visits, one-on-ones with the founders, and employee surveys, in addition to the review of policies, agreement, and other paperwork. Given the early stage of the companies, the conditions we formalize includes a board resolution on the ESG roadmap, good governance practices of policies and strengthening employee initiatives.  This has resulted in an exceptional 90% coverage of policies between term sheet to deal closure.

We have also integrated ESG across the deal to ensure it is a One Fireside effort.

Portfolio Value Add

We closely monitor and review the progress on ESG roadmaps, quarterly founder meetings and board updates. Further as the company scales we help them integrate both legally mandated causes like EPR or support in rejigging their packaging or gender practices becomes critical.

We recommend solutions best-suited to their brands, for instance, Recykal for EPR and plastic neutrality, Sage for corporate governance policies, while working with experts like Packfora, Fibmold, Lucro amongst many others for plastic and packaging management. More on the impact of this in Part 2 of the blog.

Assess your consumer brand

Here’s a quick dipstick questionnaire you can rate yourself on a scale of low to high to identify how responsible is your brand. This assessment will help assess the status quo of your company. Your endeavour should be to find the balance on high impact across Social and Environmental aspects, or at the very least, double down on either high Environmental or high Social.

Founder’s Vision and Product Portfolio are the most important vectors for building responsible brands

Finding Solutions

Further, do recognize that none of this can happen overnight – take the time to define an implementation plan based on a priority matrix. For each company the risk level will vary – for example, for a chocolate brand, the cocoa shortage is a bigger risk, high on criticality to manage therefore is an urgent priority. While for a logistic company, the price of fuel is a increasing risk, and converting to EV low on challenge to implement – therefore is critical priority. Similarly, for a personal care brand, primary packaging is a medium risk while implementation is a challenging – therefore is a Must Do.

Here is a simple way to see it:

Our learnings

We know that any company embarking on a journey of responsible operations needs to set commitments, develop a strategy, and build an operational roadmap—all while measuring progress and ensuring accountability. We’ve learned a lot over the last three years, and we share that knowledge freely to maximise the positive effects of ESG as other companies develop their own roadmap.

1.       There is something to be gained at every stage

Stage-gated approach towards building an ESG-compliant consumer brand

At every stage of growth, we believe founders and brands can improve long-term financial and organizational returns, and build a positive image and reputation for their brand. Read more about this in our Primer for Responsible Startups.

2.       All companies will not be the same.

Companies practising ESG can being on a spectrum – however this is action for all.

•   Room to improve: Motivated by risk avoidance and ensuring G (Governance) – like EPR rule
•   Good: Motivated to keep up with the competition and have a sense of responsibility, but ESG is not core to their business strategy -  especially when supply chain and resources get hit.
•   Great: Motivated by their own purpose, and all ESG actions are taken consciously and strategically – this is the value system of the companies. They are like the Patagonias of the world.

Motivation levels define the depth of ESG compliance

If we correlate this to the CAGR of Indian companies of a decade we mentioned earlier – it’s 7.8%, 11%, and 15.1% that belong to Room to improve to Good to Great. 

3.       Look for the quick wins.

Whether early-stage or growth-stage, your ESG efforts can make an impact. Compliance and regulatory requirements form a strong foundation for Governance - ignoring these will only lead to financial and/or reputation risk.  Take the time to put together all the critical policies and Acts - POSH, Maternity, Labour Laws, Waste Management, and more.

Consumer brands face several issues related to packaging, and these problems are industry wide. For example, our analysis shows us for a company with a <INR 50 CR annual turnover, plastic positivity costs within the range of 0.5-0.9% of the revenue, while for a company with a >INR50Cr turnover, it’s a matter of compliance. 

Correcting the hiring funnel for diversity can happen through inclusive practices. Don’t stop hiring men, but do make sure you evaluate an equal number of women’s CVs. This effort also goes beyond hiring, as you have to create an environment where all can thrive.

Like any other business function, ESG actions requires a cross functional approach and allocation of resources – both, human and capital, a timebound approach, and in many cases, partnerships with likeminded business to integrate these practices. We are very excited by the changing landscape in both the priorities of the brands and solutions emerging.

In the next blog, we will share the impact of ESG in the Fireside portfolio, and why we are so invested in Building Responsible, Iconic Brands.

Read the second part of The Founder’s Guide to ESG here.