As social and environmental awareness grows among consumers, so too do the demands of EU laws related to ESG. In January, the Corporate Sustainability Reporting Directive (CSRD) was introduced to update and strengthen the rules concerning the social and environmental information that companies have to report. As of the 2024 financial year, around 50k companies incorporated, listed or doing business in the EU will be required to report on their sustainability.
“ESG has emerged as a significant focus among companies,” says Anthony Virapin, worldwide leader, Entrepreneurship for Positive Impact at Microsoft. “Under new EU law, ESG reporting has become more extensive.”
This ruling is significant for all those companies in the scope (which is currently all publicly listed companies and those with two or more of the following: greater than 250 employees, more than €40m turnover, more than €20m in total assets), who now must factor in the task of reporting into their operations (if they don’t already). But it’s also an opportunity for impact startups, which aren’t in the scope, to collaborate with bigger businesses to help them meet the new targets — and to remain competitive for the future.
Here’s how companies — from big to small — can address new ESG laws.
Sustainability from the start
To address the changes in law, companies need to consider how they identify and gather sustainability-related information, manage ESG risks, and draw up policies and set targets. They may also need to reassess the relevance of those targets.
Because ESG will become so integral, Virapin recommends startups integrate it from the start, with concrete solutions.
Review your company’s mission against the ESG goals to identify the area of closest fit and start from there
“By integrating ESG factors into business models from the beginning, startups can differentiate themselves from competitors that are slower to adapt,” he says. “It's not just about innovation — although this was the case 10 years ago. Now, if you combine innovation plus ESG reporting and ESG-related changes in your business, it can really create a difference.”
For example, Netherlands-based startup and Microsoft Entrepreneurship for Positive Impact participant Enliven is a VR-powered training platform dedicated to transforming diversity, equity and inclusion training in workplaces. Its immersive and interactive simulations cover topics like gender bias, bullying, racism and sexual harassment.
Enliven’s CEO and cofounder, Katie Ireland, says the company’s purpose sits squarely within the goals of the ESG regulations and encourages fellow startups to follow suit.
“Start with your company mission,” says Ireland. “Large legislative change can be overwhelming for companies of any size. Review your company’s mission against the ESG goals to identify the area of closest fit and start from there.
“For example, at Enliven, we align most closely with the commitments centred on equity and inclusion. As with any change, impact measurement will be critical. Begin collecting data and record a baseline and, where possible, include this into your decision making alongside the standard financial KPIs. If it is not measured, it is unlikely to achieve meaningful change.”
Challenges and opportunities
New requirements, such as Scope 3 emissions reporting, which “encompasses emissions that are not produced by the company itself and are not the result of activities from assets owned or controlled by them, but by those that it’s indirectly responsible for up and down its value chain”, pose significant challenges for companies. But they also present opportunities for startups who can help bigger companies with those challenges.
Increasing regulatory requirements to take responsibility for environmental impacts are giving us market momentum
This is the case for Pina Earth, a Germany-based startup, and Microsoft Entrepreneurship for Positive Impact participant, that quantifies and rewards the carbon storage performance of sustainable forestry. By developing certified climate projects from local forests in Germany, Pina Earth is allowing companies to invest in carbon credits locally.
“Increasing regulatory requirements to take responsibility for environmental impacts are giving us market momentum,” says Dr Gesa Biermann, cofounder and CEO at Pina Earth. “However, we also have to ensure our product is aligned with regulations, such as the CSRD.”
Biermann says that despite being an impact company, Pina Earth must still be mindful of its own impact.
“Specific examples of policies we implemented include investment in climate projects equivalent to any remaining emissions since our incorporation; buying used or refurbished electronics and office equipment wherever possible; diversity goals in our hiring and investment board; and the co-creation of company goals and employee stock ownership (ESOP).”
SDGs + ESG
When it comes to addressing ESG challenges and making the appropriate changes within a startup, Virapin believes businesses that take the UN’s sustainable development goals (SDGs) and ESG into account can become more resilient.
If you add SDGs and ESG into your strategy, you can demonstrate your responsibility towards society and environment
If founders do this, Virapin says startups will be better prepared for a future where resources may be scarce, regulation may be stricter and customers may be more demanding when it comes to environmental and social performance.
“The younger generation of employees in particular want to work for a business that has a positive impact on the world and incorporates SDGs into their business strategy,” says Virapin. “Startups can both attract and retain talented employees by doing this.
“If you add SDGs and ESG into your strategy, you can demonstrate your responsibility towards society and environment and that can also improve your standing with stakeholders and the wider community.”
He adds that programmes such as Microsoft Entrepreneurship for Positive Impact can provide technology, partners and resources to address these challenges.
Step-by-step
Here are Biermann’s step-by-step tips for startups looking to improve their ESG strategy:
- Conduct a thorough assessment of your current operations and identify areas where you can make a positive impact on the environment, society and governance. This could include reducing waste and emissions, fostering diversity and inclusion, or implementing responsible governance practices;
- Set clear and measurable goals that align with your specific company's mission and values. These goals should be ambitious (but realistic) and should consider the expectations of your stakeholders;
- Integrate ESG considerations into your decision-making processes and day-to-day operations. Embed sustainability into your company culture and ensure that all employees understand and embrace the importance of ESG;
- Lastly, communicate your ESG efforts transparently to stakeholders, highlighting progress and challenges, and be open to feedback and improvement.
