This is a guest post by Trista Bridges. Its Japanese translation is available on Bridge’s Japanese edition.

Trista is a strategy and sustainable business expert, who’s passionate about changing business for good. Strongly believing that sustainable business = smart business, she co-founded Read the Air to shift mindsets, business strategies, and ways of working towards business models that put sustainability at the core.

She’s worked across various sectors including in digital media, healthcare, consumer products, and financial services. Trista is co-author of the recently released “Leading Sustainably: The path to sustainable business and how the SDGs changed everything“

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By now, you are undoubtedly aware of how sustainability has emerged as the zeitgeist of the moment – ESG investments have grown leaps and bounds in Japan and elsewhere, while the SDGs have been embraced by governments, businesses and individuals alike. Although there is no shortage of “greenwashing” at the moment, it’s undeniable that there’s a fundamental change afoot in respect to our vision of society. There’s widespread awareness that our world has some pretty audacious problems to address – from social equality to climate change and everything in between. The urgency of addressing these issues has increased, but the verdict is still out on how to best fix these problems and whose responsibility it is to do so.

Businesses are being asked to do more

In the past, we instinctively turned to the state to fix problems such as these. But we now know that government won’t be able to tackle these challenges on its own. We have transitioned to a multi-stakeholder world, one in which various entities are being compelled to take on a greater role in addressing global challenges. And there are few stakeholders who are being expected to step up more at the moment than business. Companies of all sizes are being asked to embrace a more sustainable business model, namely one that minimizes its negative “impact” on the environment and society and maximizes its positive ones. For example, moves such as Japan’s recent 2050 net zero pledge mean than businesses of all sizes will need to take steps to reduce their carbon emissions. We’ve already seen Apple’s promise to achieve 100% carbon neutrality across its entire supply chain by 2030. Others will need to take similarly bold steps.

This growing importance of impact is a sign that we are in the early stages of recalibrating how we define business value. While financial strength will always be important, there is a growing belief that companies that don’t pay attention to their environment and societal impact, as well as their own governance, are, in fact, putting their success at risk.

The impact revolution coming to tech

Until recently, this has largely been a publicly listed company phenomenon, with tech startup ecosystems generally being left outside of this debate. But now, it’s coming to tech with full force. While the ESG spotlight was first shown on Big Tech, startups, VCs and other ecosystem players are starting to be scrutinized on sustainability factors as never before. But what do innovators and their investors need to be most aware of? Here are some thoughts on how this trend is changing the game for the two core players of the tech ecosystem – VCs and startups:

VCs

Adoption of sustainability-oriented principles and practices has been spotty, to say the least, across venture capital. While private equity firms have made strides integrating ESG in recent years and, in some cases, even developing specific impact investment funds (see TPG’s Rise Fund), venture capital funds have been slow to come on-board. European VCs have perhaps seen the best progress to date, with funds like Idinvest/Eurazeo, Atomico, and Balderton being early movers on ESG or making sustainability commitments. More recently, the US venture capital space has seen an uptick in thematic funds around topics such as climate and diversity. Finally, stalwart funds like Sequoia have announced that they are actively investing in sustainability, especially in climate tech. Yet, it’s clear that this is only the beginning and that the VC community still has a ways to go. Nevertheless, there are three key reasons that we should see an acceleration in this area in the coming years:

1. Risk mitigation: With an increasingly challenging regulatory environment for finance and tech alike, a growing conscious consumer movement, and shifting norms around what constitutes “good business,” it’s an increasingly risky proposition to invest in startups without considering how they’re approaching these issues. Using ESG criteria (at a minimum) to screen investment opportunities gives investors a tangible way to help de-risk their portfolios.
2. Limited partner (LP) interests: While these entities are still looking for market leading returns from funds, sustainability is also quickly moving up their agendas. In some instances, it’s their stakeholders (shareholders, customers, contributors) who are demanding it. In others, such as family offices, individuals want to reflect their values in how they invest. In the future, it may be difficult for VCs to raise funds from reputable LPs if they don’t integrate ESG principles and practices in their fund operations and investment activities.
3. Opportunities: Earlier tech waves addressed many first-level problems, such as connectivity, efficiency, and information discovery; the next wave will tackle much more fundamental societal and environmental challenges. Future value is going to be driven by innovations that solve these complex issues.

Startups

When an entrepreneur is trying to build a company with limited resources, generally, the last thing they’re thinking about is the impact their product will have on the environment or society. Understandably, their focus tends to be more towards business fundamentals, such as product-market fit or customer acquisition. However, startups are not building their businesses in a bubble. Many of the societal and environmental dynamics mentioned in this article will impact startups’ success going forward. While there are many more support systems now to help startups scale (funding, training, etc.), the environment they are operating in is, in many ways, more complex and competitive than the one faced by their peers merely a decade ago. And this has been even further complicated by the pandemic. What can startups do to prepare and succeed in this new paradigm?

1. Anticipate risks and prepare accordingly: Startups today are innovating in areas that their predecessors shunned for fear of overregulation or sheer complexity. While this is commendable, it also presents them with new risks. Taking an approach early on which considers societal and environmental impact will help them avoid potential problems down the road. For example, are entrepreneurs innovating with AI considering potential problems around biases or possible nefarious use of the services they develop? What actions can they take to avoid these potential challenges? Or, are food delivery services thinking about fair labor practices or the environmental impact of mounds of plastic packaging waste? Getting ahead of these issues early on can help avoid potential problems, regulatory, reputational, or otherwise, down the road.
2. Respond to investors’ shifting priorities: Naturally, as VCs increasingly embrace sustainability, they are going to look to startups that do the same or are willing to do so. As VCs make commitments, they need to demonstrate to their LPs and other stakeholders that their fund and portfolio companies are moving in lock step. It goes without saying that this is a big ask of many startups. To make this work, VCs will need to support startups differently and, often, more proactively than they have in the past.
3. Lean in to sustainable innovation: Encouragingly, there are endless opportunities for startups in areas like climate tech, food tech, sustainable fashion, fintech, and healthcare. Startups that build products and services that can do things like efficiently and inexpensively capture and store carbon, significantly reduce inequalities in healthcare access, or shore up the resilience of our food systems, will be the next generation of winners. And with burgeoning success stories like Northvolt, Impossible Foods, and Japan’s own Euglena, there’s evidence that this is already coming to pass. Working today on opportunities that drive positive impact will pay dividends tomorrow.