VCs shift focus on ESG norms, not just ‘financial parameters’ for startup funding

Amid the funding winter for the Indian startup ecosystem, the shift of investors' interest towards ESG norms— environmental, social, and governance — is seen as another major reason for the funding slowdown in the new age businesses. Investors, nowadays, are more concerned about sustainability, carbon reduction, and improved working conditions of businesses, besides financial parameters.

To recall, Indian startups witnessed a decline in venture capital funding in the first quarter of 2024, especially in the tech sector. The funding-starved startup landscape in the country still stands at the third spot despite being grappled by ‘funding winter’. According to a Tracxn, only $1.6 billion has been injected into Indian startups between January to March this year, registering a decline of 51 percent.

BK Sabharwal, Chairperson of the Capital and Commodity Market Committee at PHDCCI said investors are more focused on the ESG performance of startups rather than just financial viability because it has given rise to responsible business activities. 

“It is more beneficial for startups to incorporate environmental and social aspects from the planning and incubation stage to attract better investments. Startups can engage with their upstream and downstream value chains to further play an enabling role, manage ecosystems better, and collaborate for collective action,” he told LiveMint. 

Many developmental financial institutions and foundations have dedicated their capital to ESG-related investments, said Bharat Innovation Fund co-founder Shyam Menon, adding that climate tech businesses managed to tackle the slowdown in startup funding. 

Menon stated the role of ESG is not limited to the mobility sector but includes a broad range of factors that are relevant to businesses across industries. It applies to industries like energy and utilities, manufacturing, agriculture, food production, financial services, healthcare, technology, telecommunications, consumer goods, and more. 

“The environmental aspect of ESG extends beyond electric mobility. It includes climate change mitigation, resource conservation, water and waste management, biodiversity protection, etc. The social component covers issues like human rights, labor practices, product responsibility, community relations, etc. The governance aspect focuses on corporate governance practices, ethical conduct, transparency, risk management, etc.”

“Governance went into the backburner, and blowups happened, which has got the focus back on governance. With this, sustainability is now gaining more traction in the startup industry," said Brijesh Damodaran, Managing Partner, Auxano Capital.

The Bharat Innovation Fund co-founder suggested that founders should ensure active engagement with stakeholders, employees, customers, investors, and local communities for long-run sustainability. 

“Try and adopt circular economy principles early on by designing products and services that minimize waste, promote reuse and recycling, etc. Try and establish metrics and key performance indicators (KPIs) to measure and monitor progress on ESG goals at the right time,” he added.