Startups heavily rely on trends in investor and consumer behavior. Amid volatile venture capital (VC) conditions and Gen-Z becoming more influential in the market, the ESG sector specifically is going to see growth. According to JP Morgan, “over $500 billion flowed into ESG-integrated funds in 2021.” With funds worldwide struggling to raise, a constraint on capital means that every investment decision in the near future will require more precision, which is why it is imperative that members of the VC community are informed on why ESG’s success and future growth make it an alluring investment sector.
The days of sleazy salesmen and infomercials are long over; companies must emphasize paying it forward and using their resources to tackle real issues. This isn’t just to appeal to morals. It also makes sense financially for the companies themselves. In an article published by Ecohz, “CSR improves the reputation of a firm contributing to increased stock returns and long-term financial performance.” This works because of the emergence of Gen-Z values and the influence they have on the market overall. The interconnectedness that technology has facilitated for this generation in particular, has instilled values of empathy which bleeds into purchasing decisions. In fact, Forbes quantifies this through a study that found, “When choosing among similar products, 55% of consumers indicated they are more likely to choose a product that supports a certain cause, and 70% say they are willing to pay a premium for that product.” This allows startups to leverage a pathos connection to their target market to gain traction in ways that a more traditionally-based company couldn’t. As a result, investors will fund these ventures in hopes of a higher ROI as an article by Harvard Law states, “A majority of investors report that ESG has already resulted in higher yields in their investment performance, compared with non-ESG equivalents.” The higher yield of ESG companies will be attractive for investors, therefore infusing more cash and propelling the industry.
While investors are eager to fund ESG ventures, there have been issues surrounding the integrity of these companies. While it is rare, there have been examples where founders/startups have exploited consumer trust and failed to fulfill their sustainability promises to investors, which has hurt the credibility of the industry in past years. Luckily, this concern is being addressed by increased governmental regulation and funding. In an official press release, the SEC proposed to enhance disclosures by investment advisers about ESG investment practices and create clear systems of reporting that the government can use to verify that a company is meeting its commitments. This creates a more transparent environment in which investors can feel safer funding and consumers can feel better purchasing from. According to the White House, the Biden Administration has backed ESG through “The Inflation Reduction Act (IRA) of 2022, which not only directly supports ESG principles, but also incentivizes ESG investing, earmarking $369 billion for climate change and green energy investment over the next 10 years.” When combined with the new SEC regulation, this further proves that the government is planning to bolster this sector for years to come.
Due to the long-term financial performance that ESG startups have, the cultural shift in Gen-Z’s values, the higher ROI that allures investors in a time of economic uncertainty, and governmental backing, ESG is a sector that every investor should keep their eyes on.
- Picture: PRIMER: SEC Climate-Related Disclosures for Investors | IFLR
- ESG Outlook 2022: The future of ESG investing | J.P. Morgan Asset Management.
- The Personal Brand Essentials For Next-Gen Consumers With Bianca De La Garza
- The effect of CSR on financial performance
- SEC Proposes to Enhance Disclosures by Certain Investment Advisers and Investment Companies About ESG Investment Practices
- Biden-Harris Administration Releases Inflation Reduction Act Guidebook for Clean Energy and Climate Programs | The White House
- Exponential Expectations for ESG.