Gunderson Dettmer is an international law firm specializing in the innovation economy. Its clients include pioneering companies, market-leading VCs, and high-growth equity investors.
We sat down with Natalie Pierce, Gunderson's Chair of Labor & Employment Practice, to deep dive into ESG’s growing prominence. We run through a handful of topics, covering:
- Why ignoring ESG creates problems for companies in the long term
- The best places for early-stage founders to look for ESG advice
- How the VC landscape is changing with ESG in mind
"Considering ESG early on creates an effective, proactive roadmap for planning where you want your company to be down the line."
How ESG’s Emergence Impacts Investor Priorities
ESG is a framework increasingly used by investors to measure and judge companies holistically, rather than just by their financial bottom lines.
That holistic assessment involves environmental, social, and governmental metrics.
The notion of ESG preparedness is a buzzword, of sorts, in the tech startup world, referring to specific aspects of companies like:
- The company's environmental impact
- Ethics compliance and transparency
- How a company treats its workforce
Companies that consider the ESG framework generally enjoy:
- More baked-in opportunities for value creation
- Better returns for investors
- Lower overall risk profiles
Problems That Occur When Companies Ignore ESG
Certain issues crop up when companies fail to consider ESG:
- A lack of a "speak up" culture, makes it difficult for management to identify and mitigate risks
- Shortfalls in recruitment and retention as the company scales
- A lack of diversity and representation
- Litigation risks
"It's basic– a company that isn't thinking about diversity and inclusion sets itself up for lack of diversity of thought."
Why Startups Need to Prioritize ESG Early On
Since 2020, investors have been far more careful with their investments and concerned with ESG. Natalie doesn't foresee this changing anytime soon.
Just the other week, the SEC narrowed the scope through which shareholder votes can be considered ordinary business courses.
While that only applies to public companies, it's prudent for startups to review SEC guidelines and align themselves with SEC regulations in preparation to scale later on.
Gunderson works with a high volume of emerging companies across the VC space.
Natalie heads Gunderson's labor and employment practice, where companies constantly reach out for help creating policies as they scale.
Gunderson encourages brands to have a standalone, evolving ESG policy that they can point to when recruiting and managing talent and raising funds.
This policy should involve rules and values regarding–
- Compliance mechanisms that enable a proactive "speak up" culture
- Ensuring strong data privacy protections and cybersecurity
- Diversity, equity, and inclusion policies
Where Early Stage Founders Should Look For Advice
Now that investors are so focused on companies' ESG frameworks, there's an increasing quantity of resources to give founders ESG-related advice–
“For companies starting from scratch, there are a host of resources available and good partners and investors will help you navigate the best practices.”
How Gunderson Encourages Proactive ESG Measures
Gunderson dedicates its labor and employment group to encouraging proactive, lawful company management that prevents costly mistakes later on– a challenging undertaking.
They help founders learn to manage a workforce, which is especially hard because there are many laws they're beholden to comply with, and they're not necessarily intuitive.
Gunderson has automated its tools with the end goals of efficiency, effectiveness, and responsiveness when helping startups build policies around–
- Classifying employees and protecting employee rights
- Offer letters and intellectual property agreements
- Managing employee leaves
Natalie and her team focus on the “S” and the “G” in ESG–
- S for Social– Gunderson concentrates on human capital management and the diversity, equity, and inclusion policies and procedures companies have in place.
- G for Governance– Natalie's team focuses on oversight mechanisms, ethics and codes of conduct, as they relate to policies, structure and company culture.
"Many labor laws aren't intuitive; they're not as basic as 'make sure you pay your employees.' These laws have nuance, and companies need to pay attention."
How Venture is Changing to Accommodate ESG
There's a significant trend toward investors insisting companies have ESG policies developed before they'll consider investing. This is for a couple of reasons–
- Risk Mitigation– Investors are concerned with incurring losses because a company wasn't thoughtful with employee communication and transparency.
- Generational Priorities– Millennials and gen Z want their companies to intentionally contribute to societal good, so ESG is huge for recruitment and retention.
Internal Company Discussions Around ESG
ESG has forced discussions regarding improving workforce diversity.
Natalie works with Gunderson clients to promote diversity, equity, and inclusion. They help when companies have various concerns such as–
- Someone high up in their management has received many complaints but did not share them with the company
- They know they have a diversity issue but need help to do better
- Improving workplace culture to encourage a "speak up" mentality
- Paid time off and leave policies
Recently, the SEC allowed a vote regarding CVS sick leave policies to go forward, saying that the proposal goes beyond ordinary business matters because it raises human capital management issues with broad societal impact.
That choice is another indicator of where industries are going at large and why companies shouldn't wait too long to start considering ESG.
Why ESG's Importance Will Increase In the Next Decade:
ESG as a mandatory framework will only become more common due to–
- Venture Investors– Investors are cognizant of what the market wants and are aware of the studies showing that ESG frameworks lead to greater returns and company sustainability.
- Climate Change– ESG's "E" will increase in prominence with the climate emergency as investors look at the impact products may have on the environment.
- Public Regulation– the SEC is narrowing the scope of what companies can use to challenge shareholder votes, and shareholder activism is rising.
- Consumer Opinion– The market and workforce both demand ESG compliance.
"Being cognizant of what a mature company looks like early on in terms of ESG will help you when you're raising rounds and ultimately going public."
Why Companies Should Implement ESG as Early as Possible
Early-stage companies may feel they lack the time or money to focus on anything other than products or services, but despite that, they should consider ESG as early as possible.
The ILPA questionnaire supplies a roadmap for leaders to consider how they want to set their long-term goals.
The publicly available questionnaire asks most of the questions startups should anticipate ESG-focused investors asking. It covers themes like–
- What does the industry they're a part of value, and why
- The values their startup seeks to promote
If founders jot down those ideas on paper and progress through the thought process, even if it feels imperfect, they set themselves up for success in the long run.
It's much harder to incorporate ESG down the line than it is to think about it from day one.
Once the company has even ten employees, that's enough people to form the beginnings of an ESG task force where workers can be mindful of ESG as a company value.
Next Steps: Ramping Up ESG for Early-Stage Founders
If a company is successful (which all companies hope to be), it'll start scaling, which generally has unintended consequences. Such faux pas are challenging to clean up later in the game.
Natalie tells founders to think about basic ESG tenets from the beginning–
- How they're going to foster communication as they build teams, so they hear about problems early on
- Values like workplace diversity, equity, and inclusion
- Putting together the proper compliance procedures
"Baking ESG into your DNA from the get-go is vital because it's far more difficult to retrofit and correct for deficiencies later on. It's never too soon to start."
The information contained above is provided for informational and educational purposes only, and nothing contained herein should be construed as investment advice, either on behalf of a particular security or an overall investment strategy. Information about the company is provided by the company, or comes from the companies’ public filings and is not independently verified by LTSE. Neither LTSE nor any of its affiliates makes any recommendation to buy or sell any security or any representation about the financial condition of any company. Statements regarding LTSE-listed companies are not guarantees of future performance. Actual results may differ materially from those expressed or implied. Past performance is not indicative of future results. Investors should undertake their own due diligence and carefully evaluate companies before investing. Advice from a securities professional is strongly advised.