Sustainability assessment of start-ups with the ESG Starter and the GHG & Impact Estimator

BACKGROUND PAPER Sustainability assessment of start-ups with the ESG Starter and the GHG & Impact Estimator Status October 2024 www.borderstep.org www.impactnexus.io SUSTAINABILITY ASSESSMENT OF START-UPS WITH THE ESG STARTER AND THE GHG & IMPACT ESTIMATOR Assessing the sustainability of start-ups is important for two reasons: Firstly, to create transparency at an early stage of the company‘s development regarding the status quo and potential for im provement in terms of ESG and impact. Secondly, to find out which start-ups have the greatest impact potential, e.g. in climate protection, in order to enable targeted investments in them. An ESG rating analyzes how well a company integrates environmental, social and governance aspects into its business processes to avoid risks and ensure financial stability, while an impact rating assesses the positive or negative effects of a company on society and the environment. With the „ESG Starter“ and the „GHG & Impact Estimator“, two digital tools have been developed that can be used to carry out a comprehensive sustainability assessment of start-ups. The „ESG Starter“ is a low-threshold ESG assessment that provides an overview of the current state of implementation of sustainabilityrelated measures in the company. The „GHG & Impact Estimator“ enables start-ups to define the positive sustainability impacts of their products and services on people and the environment, set themselves measurable goals, and quantify their planned climate protection potential in a well founded manner. As our data shows, the climate protection potential of individual start-ups varies from just over a hundred to several hundred thousand tons of reduced CO2e emissions per year. For particularly impactand growth-oriented, so-called transformation-oriented start-ups, an average annual climate protection potential of 30,000 tons of CO2e can be assumed. The most important facts in brief … did you know already? page 3 SUSTAINABILITY ASSESSMENT OF START-UPS WITH THE ESG STARTER AND THE GHG & IMPACT ESTIMATOR Authorship Tim Grothey Researcher Borderstep Institut M [email protected] T +49 30 306 45 100 33 Dr. Constanze Trautwein Co-founder & CPO Impact Nexus M [email protected] Prof. Dr. Klaus Fichter Director Borderstep Institut M [email protected] T +49 30 306 45 100 0 Special considerations when evaluating start-ups Start-ups are in the initial phases of company and business development. Their products, services and business models are usually still in their infancy and will change considerably in the future due to their innovative nature and the need to find the right „market fit“. As a result, the impact on sustainability can often only be estimated on the basis of assumptions and plausible scenarios. Especially in the early phases, start-ups lack established value chains and historical data that can prove their performance and effects (outcomes and impacts). Compared to large companies or established SMEs, startups also have significantly fewer resources and capacities to deal intensively with sustainability issues and their evaluation. Against this backdrop, there are three key peculiarities when assessing the sustainability impact of start-ups: 1. Firstly, the focus of the assessment cannot usually be on the impacts of a start-up that have already occurred and are measurable, but rather on the sustainability potential - i.e. the future contributions to ecological, social and economic sustainability. 2. Secondly, it is only practicable to integrate and evaluate sustainability aspects at an early stage if this is possible for both the start-up itself and external stakeholders (e.g. investors, start-up funding programs) with reasonable effort and provides information relevant to decision-making. 3. Thirdly, an approach is suitable for evaluating a startup if it can be applied flexibly in different phases, sectors and situations (DIN SPEC 90051-1 consortium, 2020). Background: Sustainability assessment of start-ups Assessing the ecological and social impact of start-ups is associated with a high degree of uncertainty and considerable effort. As a result, sustainability-oriented aspects are often not given sufficient consideration in investment decisions. As a result, promising start-ups with high sustainability potential and social benefits are often not recognized enough and do not receive sufficient financial support (Fichter et al., 2024), while capital may flow into less sustainable or less impactful companies or not into young innovative companies at all. This misallocation of capital means that start-ups with high sustainability potential often face greater challenges in further developing and scaling their ideas and thus realizing their impact potential due to insufficient appreciation of their positive externalities. A directionally sound sustainability assessment makes it possible to better channel capital towards social goals and innovation policy „missions“ (BMBF, 2023) and to increase the chances that innovative solutions for overcoming ecological and social challenges will successfully establish themselves on the market. www.borderstep.org www.impactnexus.io SUSTAINABILITY ASSESSMENT OF START-UPS WITH THE ESG STARTER AND THE GHG & IMPACT ESTIMATOR ESG Sustainability assessment of start-ups DO GOOD IMPACT DO NO HARM ESG The impact concept emphasises the idea of achieving positive effects for stakeholders, society and the environment through economic activities. In addition to economic success, the aim is to evaluate the positive contribution to overcoming ecological and social challenges. The focus of ESG is on avoiding damage caused by economic activities and thus adopts a risk perspective on the topic of sustainability. It assesses the extent to which economic activities have a negative impact on the environment and society and whether transparent and legally compliant corporate governance is practised. Two sustainability perspectives: ESG vs. impact When evaluating the sustainability of a company, a distinction can be made between two perspectives: An impact assessment pursues an opportunity perspective and aims to measure the effects of a company on stakeholders, society and the environment. It evaluates the specific results and changes generated by the company‘s activities, products and services, such as, the reduction of CO2e emissions, the creation of jobs or access to education. The main aim of the impact assessment is to understand the extent to which a company contributes to solving social and environmental challenges. The focus here is on the potential and actual impact, not just the management of risks. Figure 1: Two perspectives of sustainability assessment: ESG vs. impact The ESG assessment originates from a risk perspective and focuses on the analysis of a company‘s environmental, social and governance risks. It assesses how well a company integrates these three aspects into its business processes in order to ensure long-term sustainability and financial stability. ESG assessments are usually broad-based and take into account a variety of factors that are relevant to the company and its industry, such as resource consumption, working conditions, corporate ethics and diversity in management. page 5 SUSTAINABILITY ASSESSMENT OF START-UPS WITH THE ESG STARTER AND THE GHG & IMPACT ESTIMATOR Two digital tools for sustainability assessment Against this background, the Borderstep Institute, together with ImpactNexus GmbH and SDG INVESTMENTS GmbH, has developed two digital tools for the sustainability assessment of start-ups: Figure 2 Figure 3 These are available to start-ups free of charge in German and English and, in combination with optional portfolio functions of the ImpactNexus „Sustainability Management Platform“, offer a wide range of applications for start-ups, investors and start-up supporters. The development was funded by the Federal Ministry for Economic Affairs and Climate Protection as part of the National Climate Initiative. This background paper describes the methodology of both tools and shows the initial results, which can serve as important benchmarking data. www.impactnexus.io/ solutions-startups #ghg-impact-estimator-tool www.impactnexus.io/ solutions-startups #ESG Starter-tool The tools can be used free of charge www.borderstep.org www.impactnexus.io SUSTAINABILITY ASSESSMENT OF START-UPS WITH THE ESG STARTER AND THE GHG & IMPACT ESTIMATOR Investors Investors can professionalize the collection of sustainability data from start-up investments and create a systematic monitoring and reporting infrastructure. Business angels, venture capital funds or capital management companies can use the tools to systematize and standardize the collection and analysis of ESG and impact data. This creates the conditions for an efficient monitoring and reporting infrastructure that implements a high degree of transparency for both investors and start-ups. In combination with optional portfolio functions on the Sustainability Management Platform from ImpactNexus, the data collected can be aggregated at portfolio level, enabling transparent and meaningful reporting to stakeholders. Start-up supporters Start-up supporters can simplify the data collection processes for start-ups and optimize their workflows from the application to the awarding to the monitoring and reporting of the use of funds. Start-up supporters need simple methods for the sustainability assessment of start-ups to ensure that the funds a r e used in such a way that they serve the purpose of the funding. By systematically implementing the „ESG Starter“ and the „GHG & Impact Estimator“ in the application process, an efficient, transparent and comparable data collection process is implemented for both the funding institution and the start-ups. The tools also help with the identification and implementation of coaching and other support instruments. Additional optional portfolio functions on the ImpactNexus sustainability management platform enable structured management, monitoring and reporting of funding programs. Application and benefits of the tools With the „ESG Starter“ and the „GHG & Impact Estimator“, both a standardized collection of ESG and impact data as well as a structured evaluation of this ESG and impact data is possible. The tools can be used to efficiently map the monitoring and reporting processes relevant to investment and funding decisions between start-ups and investors or startup supporters. From the perspective of the respective target group (startups, investors, start-up supporters), there are therefore various possible applications, which are briefly described here. The Discover the next ESG & Impact Champion brochure provides further insights into the possible applications and benefits of the two tools for start-ups, investors and start-up supporters. Start-ups Start-ups can systematically record their ESG performance and impact, including their climate protection potential, and communicate this easily to all stakeholder groups. Start-ups use the „ESG Starter“ to obtain a structured assessment of their ESG performance in the shortest possible time. The ESG report depicts the implementation status of corporate sustainability measures, shows the strengths and weaknesses of the start-up and provides a wide range of support and tips. The „GHG & Impact Estimator“ can be used to describe ecological and social impacts and calculate the climate protection potential of products & services of start-ups. As a result, start-ups receive clear PDF exports that can be used to communicate their sustainability performance to all interest groups (e.g. in the pitch deck). page 7 SUSTAINABILITY ASSESSMENT OF START-UPS WITH THE ESG STARTER AND THE GHG & IMPACT ESTIMATOR ESG Starter Methodology The „ESG Starter“ is a basic company-related assessment of environmental, social and governance issues (ESG assessment) with subsequent ESG reporting. The tool is designed so that it can be used by all start-ups, regardless of their stage of development, business model or industry. It shows the current implementation status of key ESG measures in the company. Der ESG questionnaire The core of the „ESG Starter“ is a questionnaire that comprises 15 different ESG categories and thus covers the most important topics in the areas of Environment, Social, and Governance (see Table 1). The categories were derived from a comprehensive review of existing ESG standards, such as the Global Reporting Initiative (GRI), the Sustainability Accounting Standards Board (SASB) or criteria from KfW Capital, for new and established companies. The assessment also includes a query to disclose possible exclusion criteria, such as controversial business areas or legal controversies. Addressing ESG issues in the early phases of a company lays the foundation for sustainable growth and strengthens investor confidence. The „ESG Starter“ offers an easy introduction to this. Dr. Constanze Trautwein, ImpactNexus Figure 4: Selection of measures using the example of the energy category in the area of the environment www.borderstep.org www.impactnexus.io SUSTAINABILITY ASSESSMENT OF START-UPS WITH THE ESG STARTER AND THE GHG & IMPACT ESTIMATOR Work Workplace Measures that ensure a high quality of work and a good working environment, such as fair wages, family-friendly workplaces, etc. Diversity and integration Measures to promote diversity and inclusion in the workplace, e.g. promoting gender and cultural diversity in the recruitment strategy, creating a disability-friendly workplace, etc. Social damage Measures to avoid negative social impacts that arise as a direct result of the provision of services or the manufacture/delivery of products, e.g. fair prices and marketing, offering good product quality, etc. Social responsibility Corporate social responsibility activities, e.g. local community development, community sustainability advocacy, philanthropy, public knowledge creation or open source tools, etc. SOCIAL Measures to comply with labour and human rights laws for the company or key suppliers, e.g. no forced labour and compliance with local labour laws. Energy Measures to make energy consumption more sustainable, e.g. the use of renewable energies, improving energy efficiency, reducing energy-related greenhouse gas emissions. Transport Measures to make transport activities more sustainable. One example of this is the reduction of greenhouse gas emissions through transport activities or the reduction of business trips. Greenhouse gas emissions Measures to manage greenhouse gas emissions that are caused directly or indirectly by the company and cannot be clearly allocated to the areas of energy and transport. Resource consumption and utilisation Measures for more sustainable consumption and utilisation of resources within the company, such as reducing waste generation or water consumption. Pollution and environmental damage Measures that lead to the avoidance of negative environmental impacts that occur as a direct consequence of the provision of a service or the manufacture or delivery of a product. One example of this is the loss of biodiversity. ENVIRONMENT page 9 SUSTAINABILITY ASSESSMENT OF START-UPS WITH THE ESG STARTER AND THE GHG & IMPACT ESTIMATOR Data Measures to comply with best practices and legal standards for the handling of data, e.g. compliance with the GDPR and transparency about data use. Involvement of stakeholders Measures that serve to actively involve stakeholders. Business ethics Measures that prevent unethical behaviour or ensure ethical behaviour within the company. Good business ethics include, for example, combating bribery and corruption, complying with tax regulations, respecting the intellectual property of others, etc. Management & advisory board Measures to ensure a qualified and diverse management team. Regulations and standards Measures to comply with regulations (e.g. GDPR), quality and industry standards (e.g. HACCP, ISO standards) and ESG criteria that are relevant to the company. GOVERNANCE Table 1: 15 categories in the ESG assessment of the „ESG Starter“ For each of the 15 ESG categories, a large number of specific measures are proposed that lead to sustainable action within a company. Supplementary background information and good practice examples are provided for each proposed ESG measure. The start-up must now select the implementation status of the measures in each category and can differentiate between three levels: 1. „Doing it!“ 2. „Planned in the next 12 months!“ 3. „Not planned!“ Categories that are not relevant for the start-up can be completely excluded and are not included in the evaluation. They are marked as excluded areas in the results report. For example, measures in the area of „Pollution and environmental damage“ are usually not ESG-relevant for a software company, which often leads to the exclusion of this area among start-ups. www.borderstep.org www.impactnexus.io SUSTAINABILITY ASSESSMENT OF START-UPS WITH THE ESG STARTER AND THE GHG & IMPACT ESTIMATOR The forecast The „GHG & Impact Estimator“ is used to quantify the company‘s planned future climate protection impacts on the basis of the substantiated assumptions. In order to achieve this, the difference in emissions per functional unit must be offset against the company‘s planned turnover. To do this, the start-up enters the annual turnover figures expected over the next five years based on the functional unit. Some solutions lead to recurring GHG savings. This is the case when each implemented unit delivers its GHG reduction more than once during its lifetime. A typical example is the installation of a PV system that produces green electricity for at least 20 years - and not just once - and thus reduces GHG emissions. A duration of effect in years can b e specified for such recurring effects. Planned vs. potential impact Planned and potential impacts differ in the way in which the difference in emissions per functional unit is offset against a forecast and are therefore not comparable (see Project Frame). Planned effects are calculated using a bottom-up approach, i.e. a sales forecast expected by the start-up. This is particularly suitable for shortto medium-term forecasts of a start-up‘s GHG reductions. The „GHG & Impact Estimator“ is used to determine planned impacts. Potential impacts are based on a top-down approach in which market size, market trends and technology diffusion are considered. This leads to a rather long-term forecast of potential climate protection effects on a technology basis. As a result, calculations of potential impacts may well arrive at different and sometimes higher values. 3 0 . 0 0 0 t This is equivalent to the emissions reduction achieved by seven modern wind turbines that supply 24,000 households with electricity. Transformation-oriented green start-ups have the potential to reduce 30,000 tons of CO2e annually. page 17 SUSTAINABILITY ASSESSMENT OF START-UPS WITH THE ESG STARTER AND THE GHG & IMPACT ESTIMATOR However, some challenges and limitations must also be taken into account: For example, it cannot be ensured that start-ups consider the additionality of the impact. It is therefore possible that assumptions about the company‘s turnover or the definition and data collection of the comparison scenario may lead to an overestimation of the climate protection effects due to a lack of additionality. There is no mandatory additionality factor as a further uncertainty factor (as of August 2024). In addition, the question of who can take credit for how much of the achieved or potential impacts within a value chain with several participating implementers remains open. There is currently no standardized method for allocating impacts to the actors involved in achieving the impact. Figure 7: The climate protection potential on the results dashboard of the „GHG & Impact Estimator“ The result For the result, the quantified emissions difference is multiplied by the forecast for each year and added together. It represents the climate protection potential of the product or service if the start-up is successfully scaled up. Various key figures can be calculated from this: • Total GHG reductions over the next 5 years [tons of • CO2e] • Average GHG reductions per year [tons of CO2e] • Annual GHG reductions in year 1-5 [tons CO2e] • Monetized GHG reduction [€] • Specific GHG reduction per functional unit [kg CO2e] • Percentage reduction of material GHG emissions per functional unit [%] These key figures can be found on a results page, which can also be exported as a PDF. All assumptions and limitations are transparently documented so that the result can always be read and interpreted in the context of the assumptions (impact profile, comparative scenario, consumption data, GHG factors, sales forecasts, etc.). The climate protection potential quantified with the „GHG & Impact Estimator“ can be regarded as a high-quality and scientifically sound estimate of the start-up‘s future planned climate protection impact. Monetary value of the climate protection potential With the aim of understanding the level of climate protection potential, the average annual amount of planned GHG reductions can be multiplied by the current CO2 price of European emissions trading (83.24 €/t CO2, 2023). This reflects the economic value of the potential climate protection achievement. www.borderstep.org www.impactnexus.io SUSTAINABILITY ASSESSMENT OF START-UPS WITH THE ESG STARTER AND THE GHG & IMPACT ESTIMATOR Methodological ideas range from collaborative decisionmaking to equal distribution among all actors to a detailed distribution according t o monetary value added. Each method has advantages and disadvantages, as a study shows (Grothey, Fichter, Roepke, & Pantermoeller, 2024). The „GHG & Impact Estimator“ does not initially allocate the impact to different actors. Another factor not considered here are rebound effects caused by the introduction of new innovative products and services. Likewise, there is no change over time in the consumption values and emission factors that could, for example, represent future efficiency gains. This is considered acceptable for a period of five years. Key assumptions in the GHG & Impact Estimator Substitution scenario No detailed comparative life cycle assessment (LCA) but estimation of significant differences in emissions Self-assessment of the start-ups with extensive assistance Planned effect for the next five years No temporal dynamization of consumption data or GHG factors CO2 removals can be calculated, but the tool is not (yet) designed for this at the current time (as of August 2024). Benchmarking Benchmarking is relevant for the evaluation of the result, with which the climate protection potential can be compared. There are currently no available data sources with meaningful data on the quantified climate protection potential of start-ups that can be used for benchmarking. This is now possible with data from the „GHG & Impact Estimator“. The individual data entered by start-ups is securely protected under data protection law through anonymization procedures and only anonymized data and aggregated results are used. The results of the „GHG & Impact Estimator“ so far show a wide range of the climate protection potential of individual start-ups, ranging from just over 100 to several 100,000 tons of CO2e per year. This reflects the diversity of innovations and business models of start-ups whose solutions contribute to climate protection in a wide variety of sectors with a wide range of impact levels. A direct comparison of individual start-ups is only useful to a limited extent due to the limitations. However, an average potential can be calculated from all assessments. An initial estimate of an average annual climate protection potential can be found in the next section. In addition, a threshold value for the top 10 % will be a suitable indicator in future to identify so-called „high climate potential start-ups“. Frameworks considered for impact and quantification of GHG reductions Impact Management Platform Project Frame UN Sustainable Development Goals IRIS+ Impact Metrics World Resource Institute / GHG Protocol DIN SPEC 90051-1 page 19 SUSTAINABILITY ASSESSMENT OF START-UPS WITH THE ESG STARTER AND THE GHG & IMPACT ESTIMATOR Green start-ups are an important building block for the sustainability transformation. If you translate their their positive ecological impact into an economic value, by multiplying the climate protection potential with a current CO2 price of € 80, green startups generate an average monetary added value of € 2.4 million per year through their impact per year. Tim Grothey, Borderstep Institut Results & Benchmarking At the present time (August 2024), 240 companies have already described their sustainability impacts using the „GHG & Impact Estimator“. In the process, 339 impacts were created, of which over 70 % were linked to at least one of the 17 Sustainable Development Goals. Just over a third of the impacts were linked to SDG 12 measures for climate protection and 43 % of the outcomes show a direct link to the area of climate protection (e.g. „reduction of CO2 emissions“). The start-ups that have quantified their planned climate protection potential using the „GHG & Impact Estimator“ can be used to make initial estimates of the climate impact of start-ups. The quantified climate protection potential of individual start-ups ranges from just over one hundred tons to well over one hundred thousand tons of reduced GHG emissions per year. The majority of start-ups achieve a potential of between 5,000 and 50,000 tons of CO2e per year. For particularly impactand growth-oriented, so-called transformation-oriented start-ups (see Fichter, Olteanu, Hirschfeld, Walk, & Gilde, 2023, p. 22), an average annual climate protection potential of 30,000 tons of CO2e was determined. Further results from the „GHG & Impact Estimator“ Over 70 % of the impacts created were linked to sub-goals of SDGs. The three most common SDGs whose sub-goals were linked to an impact are SDG 12 Sustainable Consumption and Production (42 % of impacts), SDG 13 Climate Action (37 % of impacts) and SDG 9 Industry, Innovation and Infrastructure (28 % of impacts). SDG 16 Peace, justice and strong institutions (3 % of impacts), SDG 17 Partnerships for the Goals and SDG 1 No poverty (5 % of impacts each) are chosen least frequently. 42 % of the impacts are linked to a single SDG, but often two (20 %) or three (16 %) SDGs are selected per impact. A good one in five impacts are even assigned to more than three SDGs. 2/3 of all impacts have „people and the natural environment“ as a stakeholder, while only „people“ was se lected as a stakeholder for 18% of the impacts and only „natural environment“ for 17 %. For 64 % of the impacts, the start-up defined a KPI for measuring and tracking the impact, and additional target values were set for around a third of them. www.borderstep.org www.impactnexus.io SUSTAINABILITY ASSESSMENT OF START-UPS WITH THE ESG STARTER AND THE GHG & IMPACT ESTIMATOR Sources BMBF (Hrsg.). (2023). Umsetzung der Zukunftsstrategie Forschung und Innovation, Bericht der Bundesregierung. Bundesministerium für Bildung und Forschung (BMBF). DIN SPEC 90051-1-Konsortium. (2020). DIN SPEC 900511:2020-11, Standard für die Nachhaltigkeits-bewertung von Start ups—Teil 1: Konzept und Kriterien für die Bewertung der Potenziale und Wirkungen von Gründungsvorhaben und jungen Unternehmen auf Umwelt, Gesell-schaft und Wirtschaft. Berlin: DIN – Deutsches Institut für Normung e. V. https://doi. org/10.31030/3204886 Fichter, K., Olteanu, Y., Hirschfeld, A., Walk, V., & Gilde, J. (2023). Green Startup Monitor 2023. Ber-lin: Borderstep Institut, Startup Verband. Abgerufen von Borderstep Institut, Startup Ver-band website: https://www.borderstep.de/projekte/green-startup-monitor/ Fichter, K., Olteanu, Y., Hirschfeld, A., Walk, V., Gilde, J., Grothey, T., & Neumann, T. (2024). Green Startup Monitor 2024. Berlin: Borderstep Institut für Innovation und Nachhaltigkeit gGmbH und Bundesverband Deutsche Startups e.V. Grothey, T., Fichter, K., Roepke, H., & Pantermoeller, A. (2024). Climate Impact Attribution. Grundsätze, Regeln und Verfahren der verursachungsgerechten Zuordnung von THG-Minderungen und Carbon Credits auf Akteure und Projekte. Berlin: Borderstep Institut. Coverpicture © Deivison-AdobeStock Imprint Tim Grothey Dr. Constanze Trautwein Prof. Dr. Klaus Fichter Borderstep Institut für Innovation und Nachhaltigkeit gemeinnützige GmbH Clayallee 323 | 14169 Berlin M [email protected] T +49 30 306 45 1000 W www.borderstep.org Suggested citation: Grothey, T., Trautwein, C. & Fichter, K. (2024). Sustainability assessment of start-ups with the „ESG Starter“ and „GHG & Impact Estimator“. Methodology & Benchmarking of new digital assessment tools. Berlin: Borderstep Institute & ImpactNexus.