Jaclyn Seow of Openspace Ventures and Paul Ark, formerly of Gobi Partners, lay down the law on the Environmental, Social and Governance framework

Let’s put it bluntly: startups need to wake up and take ESG seriously, or risk repercussions. More than just a buzzworthy acronym, ESG, which stands for Environmental, Social Governance, is a set of standards used to assess a company’s behaviour that’s fast becoming a new norm in the financial sector. You can thank the general mindset shift of decision-makers who want to put the money where their mouth is—or where their values are.

ESG identifies risks and growth opportunities for every business. That’s right—every business, whether you’re a one-man show or boast a multi-market presence. For companies that don’t know where to start, we are laying it out here with insights from venture capitalists Jaclyn Seow and Paul Ark, both of who are experts in the ESG field. 

Seow is the vice president of ESG and Impact at Singapore-headquartered Openspace Ventures, a multi-stage investor in Southeast Asian B2C and B2B businesses with 44 names under its belt including Love, Bonito, Chope and GoTo. Ark is the former head of ESG at Gobi Partners, a regional venture capital firm headquartered in Kuala Lumpur and Hong Kong that has invested in more than 320 startups including Glints, Urban Revivo and Fastwork.

Read more: A beginner's guide to ESG investing

What is ESG?

At its core, ESG is a risk management framework that goes beyond grandiose plans to save the planet. “A lot of people brush off ESG as getting everybody to reduce carbon emissions, and it doesn’t make sense,” shares Seow. “If you look at ESG more broadly, it’s trying to move the world towards a more responsible form of capitalism.”

In half a generation or a generation, there's not going to be ‘responsible capitalism’. There will be capitalism, and irresponsible capitalism

- Paul Ark -

Why now?

Traditionally, startups would approach risks that revolve around finance, operations, technology, business model and market fit. In recent years, ESG risks have come to the forefront. Ark cites examples of signatory processes, accidents, grief and sexual harassment. “They’ve always been there,” the Thai-based, ex-Silicon Valley venture capitalist explains. “But they’re now achieving the light of day they might not have had in a pre-MeToo and pre-Black Lives Matter world.” 

“Where baby boomers and Gen X had a clear separation between business and their values, millennials and Gen Z don't,” he adds. “They want the companies they work for to be mission-driven, their consumer dollars to be responsible and their investments to be responsible.”

The issues that surface now reside in the collective consciousness of the younger generation, something that Seow has also observed. “I don’t need to persuade them that ESG is important,” shares the former public service executive. “They’re the ones who are asking me, ‘What do you think about ethical AI models?’ and ‘Do I have to look at climate scenarios for my business?’”

Despite this, according to Seow, an overwhelming majority of startups haven't thought about ESG. “That's understandable,” she says, “but at the same time, no matter how early the stage, every startup is dreaming of the point when they expand into a second market, bring on board formal advisors, a real human resource officer, a chief financial officer and start doing these things.”

Read more: Simple steps you can take to support and invest in sustainable businesses

Where do startups even begin?

ESG is not a one-size-fits-all framework. “Think of it like a hotel buffet,” Ark advises. “It has everything you could possibly want, but you're not going to eat everything. You pick and choose the food that is most interesting to you.” 

In a similar framework, startups need to look at the risks that are relevant and impactful to their business. As they’re tracking important metrics, Ark suggests adding two or three that are related to ESG risks. 

“Just like any startup needs to build a minimum viable product, they should think about a minimum viable process,” Ark says. “Start basic. As you get bigger, you're going to get a lot smarter about ESG and become more cognisant of the risks that impact your business.”

Read more: Gen.T Intelligence Report: The value of building a purpose-driven business

Secondly, they need to be asking themselves the right questions. At Openspace Ventures, Seow has a form that kickstarts an action plan. The questions run the gamut of environmental issues such as a business’ impact on land and measuring of emissions, to social and governance concerns that include permit requirements, HR personnel, gender diversity, employment contracts, and unions. 

Lastly, startups should be able to quantify their efforts and tie them to what they’re trying to do. “If it's a measurable and manageable risk, then it should be something that you are able to communicate as well,” Ark summarises.

E, S or G?

Governance applies to all startups, regardless of the nature of their business. Whether you look at environmental or social depends on your business’s carbon footprint—does it involve transport, manufacturing, water and land? Social is important to consider for startups that employ low-wage workers and deal with data protection and privacy. 

Having said that, the environmental branch of ESG is the one aspect that steals the stage. “Globally, when you look at measuring carbon, it's more homogenous and quantifiable,” Seow explains. Ark echoes this sentiment. “For good reason, the climate risk is getting scarier,” he affirms. “Where the biggest risks and problems are, that's where the biggest money is.” 

Governance, however, is getting more attention, particularly with more incidents coming out on fraud (FTX, for example), sexual harassment and the like. “It’s all part of operational risk management,” Seow shares. “Knowing whether or not your founder has a shady background, whether the CFO left because of a toxic CEO—all these are part of ESG.”

Read more: “Sustainability has a business opportunity perspective”: How one bank is pushing for a better future

“I don’t need to persuade [the younger generation] that ESG is important. They’re the ones who are asking me, ‘What do you think about ethical AI models?’

- Jaclyn Seow -

Responsible capitalism is here to stay

Since a lot of ESG requirements are coming from financial markets, light has been shed on the movement of responsible capitalism.

“We hear that responsible capitalism is a new breed of capitalism,” says Ark. “But to be honest, in half a generation or a generation, there's not going to be ‘responsible capitalism’. There will be capitalism, and irresponsible capitalism.”

“As an individual shareholder, I don't leave my values at the door when I make investments,” Ark further adds. “I don't exercise my values in every aspect of my life and then exclude them or ignore them when I deal with business.” 

Read more: Why impact investing is crucial, but a challenge for investors

As these ESG disclosures become more commonplace, questions surrounding carbon footprint, gender diversity and corporate governance will be prompted more frequently, with businesses being held accountable. 

“I think the sustainability world is undergoing more of an acceleration in terms of standardising approaches,” Seow shares. “We’ll move towards a common language that investors and companies understand.”

Both Ark and Seow are confident of the uplift in ESG awareness and implementation, but more startups and entrepreneurs need to get aboard this train early instead of catching up platforms behind.

“We spend a lot of time saying we want to make this world a better place for our children and our children's children,” Ark asserts. “But when we act financially in our commercial and investment decisions, it doesn't reflect that thinking at all.”

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