lassedesignen - Fotolia
Environmental social governance law enhances Danish tech’s impact
A new environmental and social law in Denmark could help the country’s tech startup ecosystem to differentiate
In late 2021, environmental social governance (ESG) became mandatory in Denmark – a transition that will provide much-needed differentiation from impact funds, and one that the country’s tech startup contingent feels it can master better than most.
While impact startups – companies addressing one or more of the UN’s sustainable development goals – in the tech space rely on the resultant product being targeted towards “doing good”, ESG holds the way those businesses behave to account, regardless of the product or service. Is employees’ mental and physical health cared for? Is the business having a positive impact on the environment? Is the company diverse and inclusive? And, most importantly for tech players, can it provide data to prove success against these environmental and social metrics?
Despite Denmark’s typically Nordic reputation for many of these social attributes, this differentiation between impact funds and ESG will be a game-changer. According to those who help drive regulation, who build companies and who invest in startups, there is a need to focus on both sides of the coin, to make the country a sustainability role model in years to come.
“The Danish venture capital ecosystem has been growing rapidly, but the primary focus for startups, traditionally, has been on capital growth, investments and talent development,” said Julie Høi-Nielsen, attorney-at-law and partner at Copenhagen-based law firm Mazanti-Andersen. “ESG was more secondary, and often conflated with a self-labelling of ‘impact startup’.”
Høi-Nielsen noted that this situation was already beginning to change before the legislation, with investors increasingly targeting companies that were not only building sustainable solutions, but were displaying a level of ethical operations from day one.
“Startups, in turn, realised they would be better positioned if they could prove both a sustainable solution and an ESG focus,” she added. “However, while it would be great if all businesses integrated the ESG aspect on their own, legislation is an effective tool to accelerate important behaviour.
“In Denmark now, there is a framework and common language that businesses can lean upon to meet these commitments, regardless of how ‘impactful’ their solution is.”
Sustainable footing for funding
This much-needed clarification between what businesses do and what they sell is especially critical for the funding side of the equation. Choosing to invest in a digital startup because of its ethical solution is one thing, but that leaves a gap for a business to undo some of that good work if it is not operating efficiently or progressively. ESG ensures that any budding partnership is built on a completely sustainable footing.
Sara Rywe is a partner at byFounders, a fund that has long made this distinction. The early-stage venture fund ensures that at least 50% of its portfolio comprises startups with impact aspirations. However, 100% must have auditable ESG integrated into the fabric of their business.
Rywe has travelled around the world and been on both sides of the corporate-startup fence through her numerous ventures and roles. From this unique vantage point, she has noticed how the narrative around ESG has changed in Denmark, as the nature of impact funding has also shifted.
“I think even now, we’re struggling to know how to measure impacts around ESG, because it’s not related to external outcomes or client results like an impact solution would be,” she said.
“However, this has changed slightly, due to the changing focus of impact companies. Before, it was about solving poverty and helping the poor, which wasn’t overly relevant in the Nordics compared to other areas of the world. Now, though, it’s more geared towards climate change, which suits Denmark and the region’s expertise in the areas of food, farming and energy.
“And when the end product is more naturally aligned to our startup ecosystems anyway, then it leaves more room to have genuine conversations around how those businesses behave too.”
Crest of a wave
Rywe has seen a resultant shift in Denmark, from ESG being “greenwashed” by the products being sold, and indeed from it being a tickbox exercise.
Its mandatory status is likely to accelerate this mindset step-change., but what it will also do is bring to light data that proves ESG is as much a financial decision as it is a sustainability one.
One company that can already showcase such a success story is Monta, a Danish electric vehicle charging specialist, founded in 2020, that has merged the best of hardware and software to capitalise on the rapid rise of electric vehicle sales. But it has done so with an equally sustainable mindset internally – an asset that has contributed just as much to the business’s rapid growth.
CTO Casper Rasmussen said: “By doing something meaningful, in a conscientious way, we have done more than catch a trend in the market. We have also caught the eye of investors and skilled people in the country. At one point late last year, we had 1,300 people applying for jobs in one month.
“This crest of a wave isn’t just for consumers, but for data scientists coming out of university who want to work in a cool, stable and ethical business. We are attracting the best talent as a result of our impactful solution, and our sustainable approach.”
Future front-runners
This is where Rasmussen believes tech startups have a natural advantage. Just as they are better able to adapt quickly to burgeoning market opportunities such as electric vehicle sales, they are also small enough to integrate new ways of working, and then provide data on how eco and social goals are being met.
He said: “New or smaller businesses can get ahead of the game and set their company up to be carbon neutral, or to set a positive company culture – to limit travel, to serve sustainable food in the workplace, to help the local community. This is much more difficult for older companies with hundreds of employees.”
All three perspectives – legal, investment and business – see Denmark as a future leader in this regard.
Mazanti Andersen’s Høi-Nielsen added: “The Nordics as a whole are front-runners when it comes to ESG and sustainability, but Denmark is currently behind Sweden, whose venture capital ecosystem is slightly more mature.
“However, this could mean a quicker injection of ESG integrations, and outcomes, in the years to come, especially now that it is a legal requirement for VC funds too.”
Rywe concluded: “I think what excites me most today, relative to a decade ago, is the funding side of it all. Nearly every new fund created is now an impact fund, which encourages startups to focus on sustainable solutions at base level. But with mandatory ESG, they also require every startup to behave in a sustainable way too.
“Traditionally, ESG in the Nordics has been under-discussed due to the focus on impact startups instead. That situation has now changed, and Denmark has a big opportunity to blend the best of both, and to set an example to the world around how startups should be formed, funded and held accountable.”
