Fast Growth Secrets Report - Part 3

Fast Growth Secrets Part 3 How to embed ESG into the DNA of your business

Contents Page 1 | How fast-growth technology businesses embed ESG into the DNA of their operations Page 2 | Our contributors Page 3 | How fast-growth technology businesses use ESG strategies for competitive advantage Page 8 | How fast-growth businesses use ESG for employee engagement and retention Page 12 | Embedding ESG into the DNA of fast-growth technology businesses Page 16 | How we can help Page 17 | Further reading

How fast-growth technology businesses embed ESG into the DNA of their operations The role technology plays in society has never been under greater scrutiny with legislators and regulators around the world scrambling to develop frameworks to address the rapid growth in artificial intelligence (AI) that will shape the next decade.

Sitting alongside regulatory frameworks are ESG and responsible business practices. These are important in shaping investment, corporate behaviour, engagement with people and communities and the impact technology businesses have on the planet.

Law firm Mills & Reeve held a roundtable discussion to explore the fastgrowth secrets of technology businesses and why they should embed ESG into the DNA of their operations.

It is the latest in a series of roundtable discussions and podcasts that explore the growth strategies and challenges of some of the UK’s most successful and ambitious technology businesses. This series shares the secrets of fast-growth businesses. You can unearth those secrets by visiting here.

The roundtable, captured in this white paper, looked to address some of these challenges and opportunities across two broad areas: 1. How fast growth technology businesses use ESG strategies for competitive advantage.

2. How fast growth technology businesses can also use ESG for employee engagement and retention.

We would welcome your thoughts and you can join the discussion online with the hashtag #FastGrowthSecrets.

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Our contributors Anthony Ball Chief financial officer, Adaptive

Tony Greenham ESG director, British Business Bank

Anastasia Lisikova Partnership lead, VantagePoint

Jess Bonner Director, Capita Scaling Partner

Jessica Ground Global head of ESG, Capital Group

Sophie Miller Innovation and growth director, Form1 Partners

Surjit Deuer Senior ESG Manager, Mills& Reeve

Judith Houston Corporate Associate, Mills & Reeve

Lizzie Richt Senior assistant company secretary, OneWeb

Toby Newman Chief operating officer, Enistic Energy Management Systems

Bertie Ivory-Peters Co-founder, Alectro

Thilo Schneider Partner, Mills & Reeve

Alison Ross Eckford Partner, Mills & Reeve

Micky Khurana VP global compliance, OneWeb

Matthew Fell Director of competitiveness, BusinessLDN

Johannes Lenhard Co-founder & co-director, VentureESG

Andrew Secker Partner, Mills & Reeve

Georgia Wilcox Senior consultant.

VantagePoint

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How fast-growth technology businesses use ESG strategies for competitive advantage ESG is more than a marketing or tick-box exercise. It is the bedrock of corporate culture, shaping the way business is conducted, the relationship it has with stakeholders, and driving a real and measurable competitive advantage.

Yet those drivers are complex and varied. ESG compliance is often required to work with national governments and by high-profile businesses substantiating their own ESG credentials. Increasingly, being transparent about your ESG performance is demanded by customers and employees (current and future).

It is, said one panellist, “no longer possible to just say ‘we do ESG’ and move on.” It needs to be part of an organisation’s DNA, implemented in a demonstratable way, with employees empowered to act. And for good reason.

Technology businesses that do not meet the ESG demands of their customers or regulators will find themselves sidelined. To work with large real estate businesses in London, for example, businesses need to show how they are actively reducing their Scope 3 emissions. In public sector procurement, evidence of social value is “a must” accounting for up to 10% of criteria.

One of the challenges facing businesses is understanding the drivers behind the ESG strategies of clients and customers. Where strategies are not aligned there is the very real risk of “tactical greenwashing”.

A clearer regulatory ESG framework will help. In its absence, it “is very difficult to control ESG strategies” and that is likely to “catch businesses out”.

Investors are also alive to the risks of greenwashing, with one investor panellist saying they require evidence of “how companies cover their [ESG] claims” before any investment is made. In the UK, the Advertising Standards Authority will investigate and take action against sustainability claims that are misleading and cannot be proven. In the US greenwashing is increasingly becoming the target of class actions.

Those that successfully defended themselves “have the technology and the data to prove their claims”. But first, says one investor panellist, “you have to collect the data”.

Intense investor scrutiny is understandable, with a recent McKinsey study suggesting businesses can expect a 2% revenue boost from strong ESG credentials, with multiple sustainability claims having an amplifying effect.

ESG delivers more than just a competitive advantage.

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Data, data, data Whilst a lot of attention is on sustainability and, in particular, Scope 3 emissions, businesses continue to question just what they should be measuring. For larger businesses, it may well be possible to address a wide range of measures across the ESG spectrum, but for smaller businesses that is rarely possible or advisable. Trying to do too much can dilute what can be achieved or worse still, risk exaggerating their ESG creds, exposing them to allegations of greenwashing.

There are, of course, many measures of how well a business may be run, but diversity in its leadership team and delivery partners is increasingly top of the list.

Panellists agreed that businesses should look to what regulations and standards require and, importantly, what customers and staff demand.

Capture the data that is needed and present that in accessible ways.

But bluntly, said one investor panellist, we want tech businesses to measure ESG credentials, because “what gets measured gets done”.

The British Business Bank looks for diversity in decision-making bodies because it “believes that leads to better decision-making. It is not a nice to have or a sort of halo effect, it is core business in how capital is deployed.”

Data too can build “social equity”, with disruptive scale-up businesses using strong ESG credentials to “build trust and social acceptance” carrying customers and employees with them on their journey. “That too can be a source of competitive advantage,” said one panellist.

Yet, for many investors, the data offered by high-growth potential tech businesses is “sketchy”. It is focused not on “operations but on perception” and does not “always reflect what is actually going on”.

And this, said an investor panellist, is a missed opportunity. “A major competitive advantage of ESG is looking at how well you run your business”.

Producing something good for the world does not mean that a business is well run, mused a panellist.

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ESG ambition ESG reporting has increased significantly since the 2020 global pandemic, yet a lack of ambition in that reporting was highlighted with businesses failing to set targets and, where targets are set, failing to report on progress.

All too often the conversation is “…by 2025 we will have done X, Y and Z. And then there is just silence”.

Businesses with strong ESG commitments need a transition plan – how will “we get from today to tomorrow”. Reporting does drive behaviour, explained a former auditor and panellist and “that is why forward-looking information is important”.

Reporting will, however, unearth uncomfortable truths. It will highlight areas where improvement is badly needed. Businesses should not be afraid to show gaps in their ESG approach, using reporting to explain their journey and how those gaps will be closed.

One example has been the reporting of diversity metrics in venture capital over the past decade, showing a marked decline. Board diversity in business has undoubtedly improved, but closer scrutiny suggests that has been achieved largely by non-exec appointments. This was likely to be easier than improving diversity around key executive positions (CEOs and CFOs).

Reporting – and delivering – on ambition will impact future sale values of technology businesses. A strong, data-driven, ambitious, and achievable ESG-focused business will “get better values” on a future exit.

Entrepreneurs need to demonstrate that they are doing more than building a business that will succeed in the relatively “benign conditions” the world has enjoyed over recent decades. To reap greater rewards, entrepreneurs need to build businesses “that can prosper in the unknown”, with strong ESG credentials embedded in corporate culture.

“Businesses that have ESG in their DNA, that fulfil a useful function for society, operating to high environmental and social standards, will prosper,” surmised one panellist.

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Aggregate confusion Whilst progress is undoubtedly being made, current ESG reporting remains confused, too often focused “on the wrong stuff”. The G, governance, in ESG is all overlooked in favour of the E, environment and S, social.

ESG reporting needs to be grounded in materiality – the measures that are important to your business. Yet time and time again, “reporting falls short”.

It is homogenised, “optimising the wrong stuff” and “isn’t a good indicator of ESG” as part of corporate DNA. It is, panellists recognised, very much in its infancy, with a recent MIT study categorising it as “aggregate confusion”. We can expect considerable progress in coming years.

Perhaps the driver for better reporting will come from the investor community.

Raising money from VCs without good ESG integration will be challenging, if not impossible. Add to that the investments made by some governments, where investments are made not for profit but for development reasons, ESG is no longer a “tabletop exercise”.

It means that “if you want to be in the game, you have to reach a level of ESG that you will not get credit for…and to get better advantage, you need to go further”.

Panellists agreed that if the G were to lead ESG strategies everything else “would follow”. A business that is serious about the E or the S will reflect that in its governance structure. If, said one panellist, “you are serious about diversity and mental health, reporting of those measures will follow from the G”.

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“ESG compliance is at the top of boardroom agendas and whilst the pressure to do business differently may be daunting, fast growth tech businesses are in an ideal position to embed ESG into their culture and practices from the start. They’re unencumbered by the retrofit issues which are facing more established companies.

Businesses should work out what is important to them and their customers, maximise accurate data collection across their operations, and be transparent in their measuring and reporting. ESG should be viewed as an opportunity to drive value and longer-term resilience and prosperity – doing nothing is the much greater risk.”

Alison Ross Eckford Commercial Partner, Mills & Reeve

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How fast-growth businesses use ESG for employee engagement and retention The labour market in the UK continues to be tight, and even more so in the technology sector. For many, competing on salary alone is not enough or possible. A business needs a purpose. More so than ever, to compete for the best of talent.

It is recognised that for some businesses the ESG agenda is often less about impact and more how it is run. Yet impact captured in purpose and ESG performance are unquestionably and inextricably linked – the push factors on ESG compliance work hand in hand with the pull factors from talent.

Purpose is one of the most discussed – and divisive - aspects of the ESG agenda despite its ability to engage and motivate a more mobile workforce.

Purpose-led businesses do attract people who share or empathise with that purpose, and that does “orientate ESG strategies”. It is increasingly difficult to “separate purpose and ESG”, with the strong reporting of ESG achievements a powerful way to “demonstrate progress towards that purpose”.

But where does purpose sit within the ESG agenda, and can purpose even be considered part of ESG? Just because a business has strong ESG credentials “it doesn’t mean your business is any good,” one investor panellist observed. There are some segments in the economy where you have businesses whose ESG performance is incredibly strong but who supply goods or services which may, depending on your social, moral and ethical perspective, be seen negatively, such as certain fast-food businesses. The uncomfortable question surrounding ESG is that it is “possible to perform well and still do bad stuff”. It is also uncomfortable assessing whether a company is good.

Businesses that ignore purpose may well find themselves trailing in talent acquisition. A younger and well-educated workforce, especially the generation in their early 20s, now entering the workplace today, want to work for organisations “that make a difference”.

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Overlooked opportunity This ambition presents interesting opportunities for businesses – ones that are often overlooked. How can businesses leverage change from this movement?

It is often small steps that lead to big changes. One panellist shared the example of an employee-led campaign for businesses to publish their maternity pay policies to better retain and keep top female talent. “It’s not the aspirational or the big things that necessarily make a difference.

Businesses are doing lots of little things…and they end up having a bounce.”

Building a more sustainable business is a huge change-management project and needs “top-down and bottom-up engagement” from every employee. It often needs “a big stick” to get things started but will quickly gather momentum.

Businesses may be tempted to link the “big stick” of executive pay with ESG delivery. It is, it was agreed, perhaps too blunt to be effective. Yes, when bonuses are tied to ESG performance, leadership teams are “more likely to give people the space” to deliver, but it also risks optimising the “things that don’t really matter to the business”.

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Community matters “Amazing people and communities can be found” in most organisations.

They are an asset that businesses should leverage to drive change at a faster pace, but they need to be given the time and space to do so.

The example of Sky was shared, where an individual having returned from maternity leave wished to create a community to help new mums return to the workplace. Sky’s leadership team gave her the space to do so, with a programme created across the organisation with champions supporting new parents returning to work.

It begs the question, should people policies be a fundamental part of an ESG programme?

Authenticity in purpose is, however, fundamental. For a law firm, like Mills & Reeve, that looks at how we support under-represented people in their careers, diversity and inclusion, through to the types of clients we choose to work with.

This, of course, will vary from business to business and, interestingly, needs not to be “100% fixed before it delivers competitive advantage”. A demonstratable authentic purpose stands businesses apart from each other, attracting both like-minded employees and customers.

In reality, a broad range of measures are needed to give businesses a competitive advantage in talent strategies. Purpose will gain greater currency, but pay, fairness and transparency remain fundamental.

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“Being able to articulate business values is increasingly key for retaining, engaging and attracting the best talent. Since values can be hard to articulate, it can be simpler and easier for companies to be able to demonstrate who they are and what they stand for via their ESG proposition. It follows that the business which can most authentically show how it measures and rewards staff based not simply on financial/output goals but on value or ESG could steal a march on its competitors.”

Andrew Secker Employment Partner, Mills & Reeve

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Embedding ESG into the DNA of fast-growth technology businesses The profound shift in stakeholder expectations and the recognition of ESG factors as drivers of both opportunity and risk is driving momentum on corporate action on sustainability. With sustainable investing firmly in the mainstream, investors are considering ESG performance as a key factor in deciding whether or not to invest in a business. For start-ups and fast-growth companies this presents both unique challenges and opportunities.

Start-ups have the advantage of agility to make change happen quickly that larger organisations lack. Embedding ESG principles early on can therefore avoid the complexities of retrofitting these principles into established business models. Excelling in ESG can mitigate risks and drive value – from access to capital and business efficiency, to brand and competitive advantage and winning the war for talent.

In addition to the voices presented in this report, we have learned from supporting clients across various sectors on theirs. To inspire you to discover your own ESG potential, here are five key tips:

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1. Put purpose before strategy Purpose is a more than branding and PR. By laying this foundation early, founders and CEOs can establish a clear business agenda focused on positive societal contributions, fair employee compensation, customer value and respect for the communities and the environment in which it operates. This purpose should act as a beacon guiding decision-making and trade-offs in critical moments.

2. Identify material risks and understand why ESG matters to your business Your ESG strategy must be proportionate to the size and scale of your organisation, the sector you operate in and meet the needs of your key stakeholders. A materiality assessment, engaging stakeholders, is crucial in identifying key risks material to the business. Frameworks such as Sustainable Accounting Standards Board (SASB), Task Force on Climate-related Financial Disclosures (TCFD) and Global Reporting Initiative (GRI) provide industry specific guidance and disclosure standards on fundamental ESG issues. By focusing on materiality, you can achieve buy-in and allocate resources more effectively to address priority issues.

For start-ups, this could mean covering basics like setting climate targets on E, a strong social contract including ‘living’ wage, building an inclusive culture and supporting wellbeing on S and robust governance and rock-solid data security and privacy processes on G.

3. Integrate sustainability into core business operations Sustainability should be a collective goal as ultimately everyone in your organisation is responsible for helping to deliver sustainability. Senior leadership support and a cross-functional approach involving departments like legal, risk, HR, finance and marketing ensure shared ownership of ESG goals. This integration fosters a holistic approach to managing inter-connected ESG issues.

4. Implement your strategy Begin with setting clear ESG goals and objectives. Develop a roadmap for achieving these goals and ensure regular monitoring and reporting of progress.

Engage employees at all levels in sustainability initiatives and seek feedback from stakeholders to continuously improve ESG practices.

5. Authentic and transparent communication Build trust and credibility with stakeholders through authentic communications on your website, sustainability reports, social media and other platforms. Beware of greenwashing as any organisation that overstates its ESG achievements will get found out quickly, risk being “cancelled” on social media and being called out by both stakeholders and regulators. Back up your claims with tangible actions and progress. Ensure a holistic approach to avoid overlooking any of the ESG dimensions. Third-party certifications like B Corp and alignment with the globally recognised UN Sustainable Development Goals will further validate your ESG performance.

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“Integrating ESG into your company’s strategy not only attracts talent and helps to differentiate you in the marketplace, but it also opens up opportunities for growth and innovation.”

Judith Houston Corporate Associate, Mills & Reeve

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“By proactively building purpose and ESG into their DNA from the start, fast-growth technology companies will not only mitigate risks, but also unlock opportunities to build reputation and foster sustainable growth.

Start-ups have the advantage of agility and flexibility to make change happen quickly. Getting on board with ESG as early as possible by creating the right culture and mindset from the outset means that it will scale with you as you grow.”

Surjit Deuer Senior ESG Manager, Mills & Reeve

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How can we help We’re centred on achieving more for our clients, their businesses and the wider communities we serve. Mills & Reeve, a full-service law firm, is the legal adviser behind some of the UK’s most successful technology businesses. We act for entrepreneurs leading fast-growth technology start-ups and spin-outs through to IPO, and work closely with global technology giants and their investors. With seven offices across the UK including Oxford, Cambridge and London, our specialist team provide the full range of legal services that you need, always with a focus on your objectives.

Get in touch Alison Ross Eckford Partner alison.rosseckford@mills-reeve.com

Judith Houston Corporate Associate judith.houston@mills-reeve.com

Thilo Schneider Partner thilo.schneider@mills-reeve.com

Surjit Deuer Senior ESG Manager surjit.deuer@mills-reeve.com

Andrew Secker Partner andrew.secker@mills-reeve.com

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Further reading If you’re interested in finding out more about the topics discussed in this report, our ESG experts have linked below some further online reading.

Harvard Business Review: Startups Need an ESG Strategy World Economic Forum (WEF) Forbes: Why And How To Build Your Startup Business Around ESG McKinsey: Embedding ESG and purpose in your organization MIT Management Sloan School

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