ESG for Founders: Why Environmental, Social and Governance Standards Are Now a Funding Requirement in the US and UK

Five years ago, ESG — Environmental, Social, and Governance — was a concept that most startup founders could reasonably ignore. It was a framework for public companies, a reporting requirement for large institutions, and a concern for sustainability-focused funds that represented a small fraction of the overall capital market. That has changed fundamentally, and founders who continue to treat ESG as irrelevant to their funding conversations are now getting caught out.

The Scale of the Shift

The numbers tell the story clearly. In 2024, sustainable investment assets in the US reached $52.5 trillion, with $6.5 trillion — 12% of total managed assets — explicitly identified as sustainable or ESG investments. Globally, sustainable finance issuance in the first seven months of 2025 reached $975 billion. Despite short-term volatility driven by political headwinds, global ESG fund assets remained at $3.16 trillion as of March 2025.

These are not marginal numbers. They represent a structural shift in how capital is allocated — one that is now filtering down from institutional funds into venture capital, private equity, and even angel investment in both the US and UK.

What Is Driving the Change?

The shift toward ESG-embedded investment decisions is being driven by three converging forces: regulatory pressure, investor demand, and risk management.

Regulatory pressure is the most concrete driver. In the UK, the Financial Conduct Authority's Sustainability Disclosure Requirements (SDR) came into force in December 2024, requiring fund managers to substantiate sustainability claims and introducing a labelling regime for sustainable investment products. The UK Government published its long-awaited Sustainability Reporting Standards (UK SRS) on 25 February 2025, based on the ISSB's IFRS S1 and IFRS S2 standards, available initially for voluntary use with mandatory requirements under consultation. Businesses can voluntarily report against these standards now, though the mandatory framework continues to develop.

The UK's position aligns with broader global trends. The ISSB (International Sustainability Standards Board) has published standards that are being adopted across more than 40 jurisdictions. The EU's Corporate Sustainability Reporting Directive (CSRD), which mandated ESG reporting from 2025 for large companies, now applies to non-EU businesses with significant European operations — which captures many US and UK founder-led businesses with European customers or investors.

Limited Partner (LP) demand is the second major driver. VC funds raise their capital from LPs — pension funds, endowments, sovereign wealth funds, family offices, and institutional investors — who are themselves under mounting pressure from their own beneficiaries and regulators to demonstrate ESG integration. When LPs demand that VC funds incorporate ESG into their investment processes, those requirements cascade down to the startups those funds invest in. Future Planet Capital, for example, is a signatory to the UN Principles for Responsible Investment, committing to incorporate ESG issues into all investment analysis and decision-making processes. UK Private Capital actively encourages PE and VC industry signatories to adopt science-based targets and integrate biodiversity considerations into investment processes.

Risk management is the third driver. Investors understand that ignoring ESG issues creates financial risks — from regulatory penalties and reputational damage to supply chain vulnerabilities and talent retention problems. ESG is not a soft, ethical overlay on investment decisions. It is an increasingly well-evidenced risk management framework.

What ESG Actually Means for Founders

For founders, ESG breaks down into three practical domains:

Environmental covers your business's impact on the natural environment — carbon emissions, energy use, waste, water consumption, and supply chain environmental practices. For most early-stage startups, this means at minimum understanding your Scope 1 and Scope 2 emissions (direct emissions from your operations and indirect emissions from purchased energy) and beginning to track them with documented methodology. Scope 3 emissions — indirect emissions across your value chain, including those from your customers' use of your products — are more complex and remain optional under the UK SRS.

Social covers how your business treats people — employees, customers, communities, and supply chain workers. This includes diversity and inclusion at every level of your organisation, fair pay and working conditions, customer data privacy and security, and the social impact of your products or services. Investors increasingly ask for diversity data as part of due diligence — not as a tick-box exercise, but because research consistently shows that diverse leadership teams deliver stronger financial performance.

Governance covers how your business is managed and controlled. This is the domain most familiar to founders from a fundraising perspective — it encompasses board composition, decision-making processes, financial controls, transparency with stakeholders, and management of conflicts of interest. Good governance is the foundation on which environmental and social commitments can be credibly built and maintained.

The Current US Context

The US ESG landscape is more politically contested than the UK. The Trump administration's actions since January 2025 — including executive orders targeting diversity and inclusion and an anti-climate policy stance — have introduced legal uncertainties that led some US asset managers to scale back global ESG promotion. Geopolitical tensions have contributed to volatility in US sustainable fund flows.

However, the structural investor demand for ESG integration has not evaporated. Many large US institutional investors and family offices continue to require ESG frameworks from their portfolio companies. The key distinction is between performative ESG — the kind of marketing-led sustainability claims that have attracted scrutiny — and substantive ESG integration that represents genuine risk management and operational discipline. The former is under pressure; the latter continues to attract premium valuations.

For US-based founders, the practical implication is to focus on substance over signalling. Document your governance practices, track your environmental data with credible methodology, and build social impact measurement into your operations. Avoid making ESG claims in your marketing materials that are not supported by underlying data — the regulatory and reputational risk of greenwashing is now significant in both the US and UK.

Practical Steps for Founders

Start with governance. The G in ESG is often the easiest place to begin, because many governance improvements — board independence, financial controls, transparent reporting — are also fundamental best practices for any well-run business.

Establish a baseline. Before you can demonstrate ESG progress to investors, you need to know where you are starting from. Conduct a basic materiality assessment — an honest evaluation of which ESG factors are most relevant to your specific business, industry, and stakeholder base. This does not require an expensive consultant. For most founder-led businesses, a well-structured half-day workshop with your founding team and key advisors is sufficient to identify the three to five ESG factors that matter most to your business.

Measure what matters. Once you have identified your material ESG factors, build basic measurement systems. For carbon emissions, tools like DitchCarbon (UK-based, focused on Scope 3 emissions and supplier scoring) and Yayzy (a UK-founded fintech that tracks carbon emissions through spending data) offer accessible platforms for startups. For social metrics, begin with what you are already required to track for employment law compliance — pay equity data, diversity across hiring and promotion, employee retention rates — and build from there.

Build ESG into your investor narrative. When you next approach investors, incorporate ESG into your pitch not as a separate section but as an integrated element of your business narrative. Explain how your environmental practices reduce operational risk, how your governance structures protect investor capital, and how your social commitments underpin your talent strategy. This is not virtue signalling — it is demonstrating that ESG is embedded in how you run your business, not appended to it.

ESG talking points for your pitch deck:

You do not need a separate “ESG slide.” You need 3–5 clear talking points woven into slides you already have:

• Risk slide
  “Here’s how we manage environmental and social risks that could hit our revenue or cost base – for example, energy use, key suppliers, and data privacy.”
• Team / talent slide
  “Here’s how our hiring, pay and culture practices support performance and retention – and the basic diversity and pay‑equity data we track.”
• Governance slide
  “Here’s how our board, decision‑making and financial controls protect investor capital – including who signs off on spend and how often we review performance.”
• Traction / operations slide
  “Here are the 2–3 ESG metrics we already track (e.g. emissions from travel, gender balance in leadership, on‑time board packs) and how they support our growth story.”

Use these as plug‑and‑play prompts: if you can answer each line credibly, you already have the backbone of an ESG story investors can trust.

Engage your supply chain. For businesses with complex supply chains, supplier ESG practices are increasingly in scope for investor due diligence. Begin conversations with your key suppliers about their ESG practices. This positions you ahead of the regulatory curve — particularly in relation to the EU's CSRD requirements for supply chain disclosure, which apply to non-EU companies selling into European markets.

Start enhancing the G in ESG within your business using the free Starter Governance Checklist for Founders. Access it here.