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For all the ESG talk, just 7% of startups have an actual net zero plan

When it comes to ESG, startups are good on the S and the G; but struggle on the E.

By Freya Pratty

green forest with mist and clear blank space

There’s more and more ESG talk in tech and VC land. Environmental, social and governance factors have gone from being a concern of specialist investors to a key part of mainstream investment strategy.

But, for all the talk, how are VC firms’ portfolio companies actually doing? Well — much better on the S and the G than the E, new research shows. 

The average performance of early-stage startups on environmental metrics is almost 50% lower than social and governance metrics. Just 7% of startups have a policy in place to achieve net zero carbon.

That’s according to data collected by ESG_VC, an industry initiative backed by VC firms. The research analysed 225 companies from the portfolios of 11 firms, including Seedcamp, Beringea, Highland and Molten. 

More startups are implementing policies to improve their performance against ESG metrics, given research which shows such actions can improve performance. Talent, customers and investors have also started to demand more progress. 

Better on diversity and mental health; bad on emissions

The study asked startups to respond to a range of metrics spanning ESG practices. The average score for environmental metrics was 1.4 out of 4, compared to 2.6 for social and 2.7 for governance.

In particular, startups showed strong progress on diversity and inclusion in the workplace and mental health provision. 

57% of companies said they would provide diversity and inclusion training for their teams this year, and 58% said they have a mental health policy in place. Likewise, nearly 40% of businesses are looking to measure the gender pay gap.

On environmental metrics, in comparison, just 11% of companies measure their carbon footprint (though 27% intend to do that this year) and only 7% have a net zero carbon plan in place. 

Bigger and better

The research shows that VC-backed companies get better as they get bigger, however. On environmental metrics, 14% of Series A companies scored 3 out of 4 stars, compared to 27% at Series C and beyond. 

It’s the same for social and governance metrics — companies at Series C stage and beyond score significantly higher than their earlier stage peers.

“Early-stage companies can feel overwhelmed by a plethora of frameworks, acronyms, platforms, and other solutions,” says Karen McCormick, chair of ESG_VC. “Companies are, therefore, struggling to feel incentivised to invest the substantial time and resources in getting to grips with this complex topic — particularly when a startup’s environmental footprint may feel less impactful than say a global conglomerate.”

Fintech and SaaS score lowest on environmental metrics

There are some differences between sectors too. The research found that SaaS and fintech companies have struggled to adopt environmentally friendly practices at the rate of other industries. 

65% of SaaS companies surveyed scored 1 out of 4 stars on environmental metrics. Ecommerce and manufacturing companies did well — scoring 3 stars on average. 

Change has to come from investors as well as startups themselves, McCormick says. “It’s our responsibility as investors to take some of the burden away from startups that are struggling to know how get started,” she says.

“Often, this simply means helping them with quick wins — and whether it’s saying ‘here’s an offsetting platform that we can recommend’ or ‘we know a good consultant for carbon measurement’, these little nudges in the right direction can make a big difference. As investors, when we can point our portfolio companies to useful resources, they’re all in.”

Freya Pratty is a reporter at Sifted. She tweets from @FPratty and writes our sustainability-focused newsletter, Sustain. You can sign up here.

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