ESG ESOP, a new tool to enhance startups ESG performance

Article Date
November 28, 2023

ESG initiatives are long run actions. To be impactful they have to be carried by founders but they also have to involve and federate all the company’s key employees. 

At Axeleo Capital, we have been thinking about setting up an ESOP plan, the exercise of which would be partly indexed to the achievement of predefined extra-financial targets agreed between management and investors (in the same way as "performance" ESOPs, which are often indexed solely to the achievement of business and/or financial targets).
With this in mind, we have worked in collaboration with the law firm August Debouzy, which assists many startups in their social life, to create an "ESG" ESOP template that can be applied to any early-stage startup.
The main goal of this approach is to create a holistic alignment of interests between key employees and managers who contribute to ESG performance, and investors who set expectations in terms of ESG performance.
This tool is therefore a practical way of establishing a clear and transparent framework for dialogue between investors and startups concerning their ESG roadmap. As early-stage investors, our ESG expectations are often blurred (especially for very young companies) and focused on reporting obligations. One of the aims of our white paper is to propose 10 target indicators for an early-stage startup. These indicators are obviously adaptable, but they can serve as a working basis for a company that doesn't know where to start.

ESG ESOP principle: managers and investors have to agree on a list of 10 ESG targets to be achieved, based on objective and measurable indicators. To be exercisable, the startup must have achieved at least 5 of the 10 objectives by the time of the exercise.

Our 6 recommendations to ensure that the ESG ESOP plan is set up in good understanding between investors and startups:  
1 - On the investor's side: integrate ESG ESOP plan upstream of discussions on a potential investment (letter of intent to invest)

2 - Define the same allocation percentage for all employee beneficiaries between “ESG” ESOP and “regular ESOP” - Our target: ESG ESOP should represent between 25% to 50% out of the total ESOP

3 - Define 10 measurable goals in line with the company's maturity stage (and co-constructed by the company and the investor)

4 - Review these 10 goals when new ESOP plans are put in place - Our target frequency : every 24-36 months

5 - Formally monitor the achievement of these objectives at least once a year at Board level. The Board will be responsible for validating the achievement of objectives

6 - Seek the support of a legal or tax advisor when setting up ESOPs (particularly with regard to tax issues)

Finally, we propose to share a list of 10 standard ESG indicators that we feel are applicable to any early-stage startup whatever its business. This list is neither exhaustive nor cast in stone, but can serve as a working basis for establishing an ESG roadmap for every early stage company.

1 - Carbon footprint measurement: Scope 1, 2 & 3 greenhouse gas emissions Assessment less than 24 months old;

2 - Climate awareness: Proof of an awareness-raising campaign on the challenges of climate change carried out within the last 24 months for at least 50% of the workforce;

3 - Soft mobility: Offer soft transport solutions to all employees (Sustainable mobility package for employee journeys by bike, carpooling, electrification of corporate vehicles);

4 - Label: Obtain an environmental or social label within the last 24 months;

5 - Precariousness: Workforce (permanent contracts, fixed-term contracts, trainees, apprentices) composed of at least 75% permanent contracts.

6 - Gender balance : minimum 40% women on permanent contracts;

7 - Equal pay: 30% women in the top 10 salaries;

8 - Quality of Life at Work : Implementation of non-monetary benefits for all employees. E.g.: employer's contribution to complementary health insurance above the legal obligation, employer's financing of workplace nurseries, etc. ... ;

9 - Governance: At least one independent board member at non executive governance body ;

10 -Training: access to internal or external professional training for at least 30% of the workforce over the last 12 months;

There are, of course, other remuneration schemes that can incorporate sustainability criteria (profit-sharing, individual performance bonuses). The idea is to choose the right tool(s) for each company at each stage of its life.

Don’t hesitate to download our white paper and our ESG ESOP template to make up your own mind. 

And don't forget to share your feedback with us!