27. Megan Murday on ESG, diversity, and sustainability for startups

Audio Transcript:

[00:00:07.060] – Garr Punnett

Welcome back, masters of Multiusiverse. My name is Garr Punnett, Chief Impact Officer here at Rheaply. We have another great podcast coming your way. My job was easy on this podcast because Megan was such a great guest. Megan Murday is the CEO of Metric ESG, which is bringing ESG, metrics and data to small businesses looking to scale. That’s really important as we get into it, mostly because small businesses tend to think, oh, we don’t need ESG data, we’re too small. Well, she sets me right on that and you’re going to really enjoy this podcast. Check out more of our podcasts at rheaply.com/multi-usiverse-podcast/. We have a brand new site ready to take you on our journey back into the multiusiverse. Check it out. Okay, Megan, thank you so much for joining us today. Can you talk a little bit about you, the company that you started and then also how you got into this space and really what the journey has been like for you?

[00:01:05.210] – Megan Murday

Sure. Thank you so much for having me on the podcast. Really excited for the conversation. So I grew up in a south suburb of Chicago, a fairly deindustrialized, rustpell type of town. So I grew up interested in policy solutions for environmental and social externalities from business. Expected to work for the government. Studied policy at Georgetown as an undergrad, did the Capitol Hill and State Department internship route, and saw pretty quickly that the speed and scale for change in the public sector is perhaps not as great as I would have hoped. So spent several years at Deloitte in the strategy analytics consulting practice and then was going back for my MBA at Harvard and was looking for what kinds of companies I might want to work for after school. Was interested in startups. I was looking for a company that was achieving some level of good as part of their business model, not their corporate philanthropic efforts. And so I was looking for data on what companies were achieving, whether that was a contribution to climate change or reducing inequality. And I couldn’t find that much data out there for startups in particular. So that’s when I came across the ESG and Impact data space.

[00:02:08.740] – Megan Murday

So while at HBS, I co founded the Sustainability Club. That was 2019, if it tells you anything about where we were at on climate at that time, but really spent those two years looking into ESG and Impact data. And so what we’re building at Metric and what came out of that research was a platform to help venture capital and growth equity funds measure benchmark and improve their ESG performance across their portfolio. So we work with venture investors and startups to not only do that initial baseline measurement of ESG and impact, but really help them improve. So it’s not just a reporting and compliance aspect. We are more interested in how do you drive improvement and how do you use ESG to improve your financial and operational outcomes as a company.

[00:02:52.780] – Garr Punnett

So why is it so important for a small business or a growing business or a company that has a portfolio of small businesses? And I say small businesses, quote unquote too, because a small business technically can be anything up to 500 employees. And then you get into medium size and larger size. Is small business where you guys are kind of focused in terms of that up to 500? Is that sort of the market? And again, why is that so important?

[00:03:18.040] – Megan Murday

Sure. So we work with venture investors who are investing in companies anywhere from five to 1000 employees. So it’s certainly a spread. But we used to hear that all the time we’re too small, we don’t need to worry about ESG. And there’s a misconception that you only need to worry about it when you’re a public company, but in some senses it’s too late at that point. So we are more interested in how startups not only can embed principles of sustainability, of equity into the very fabric of their companies with thesis that as they scale, they’ll scale those benefits, but they’ll also change the narrative around what it means to run a company. So we always say that startups, of course aren’t the largest component of our GDP of the country, but they punch above their weight in terms of thought leadership. So large Fortune 100 companies are trying to compete for the same talent as maybe a 500 person startup. But if an employee has gotten used to sharing values with their employer, working on a mission oriented project, that starts to change what the expectation is on how companies behave at larger scales too.

[00:04:20.800] – Megan Murday

So we’re excited about the startup and venture space not only because we can help them embed these principles in the company as they scale, so they don’t have problems down the line, but also because it changes how larger companies think about the future of work and how they need to behave as a stakeholder.

[00:04:38.020] – Garr Punnett

I like that. It’s like the downstream impacts of, again, smaller companies proving to larger companies on almost like talent acquisition and marketing and talking about, again the future of their business and almost forcing the hand of larger companies to almost recognize that. I love that. Can we step into a little bit of why or how I guess we start to measure ESG at smaller companies? We are still a small company here at Rheaply by many standards, and I remember going down this route a little bit, and I myself thought probably 30 employees ago, oh, this is too early. Like there’s just no point in tracking this. Why was I wrong? And where could sort of you help me in this?

[00:05:25.240] – Megan Murday

Sure. So first I want to take a step back and separate out ESG and impact and maybe even define ESG since it’s a fairly investor-heavy term. I’m not sure if you asked all of my family members if they could define what ESG meant. So ESG is Environmental, Social and Governance performance and it’s about how you run your company. Impact is an environmental or social outcome created by your product. So either how it’s used or how the product is manufactured. For early stage companies, we suggest that they start just with the basics. So this is diversity and it tends to be carbon emissions. And then if they have a product that they are selling as a more sustainable alternative, for example, then it’s great to quantify impact. So for Rheaply, for example, it would be interesting to know for a typical engagement what’s the waste reduction and my guess is that that was part of your pitch. It was actually something that your team is quantifying, just wasn’t calling it impact management. We argue for diversity and carbon at the earliest stages. One on the diversity front, not only does having greater diversity in your first ten mean that you’ll have a more inclusive culture, it broadens your access to talent pipelines.

[00:06:35.250] – Megan Murday

And then finally when we think about a wealth distribution perspective, startups are one of the best ways to make generational wealth in this country without being born wealthy. But that’s more true if you are in the first ten employees. So when we think about composition of those early teams, who is getting the most exposure to an exit, whether that’s an IPO, an merger acquisition, it’s important we think about who gets exposure to early stage startups and then who also sees the windfall and then can go invest or build the next company. So diversity, certainly moral reasons. And then there is a business case there too for carbon. It’s good to track the carbon intensity of the business. So overall carbon emissions for a small scale startup, of course going to be small, the carbon footprint will be small. But it’s good to start tracking what the carbon intensity of a dollar of revenue is because ostensibly those carbon emissions will scale as your business scales too. And there are things that you can do to delink the carbon intensity of your business and your revenue. So for example, if you’re a software company, you’re going to have quite a big cloud footprint.

[00:07:48.940] – Megan Murday

So Google, for example, lets you pick which data center you use to use as your basis and you can pick what the renewable makeup of that data center is. So you can actually pick data centers that are empowered exclusively by renewable energy. So there are different decisions that companies can make early to draw down, like the carbon intensity of their business. And that’s easier to do when you’re making those foundational decisions like who’s going to be our cloud provider versus trying to go back and retrofit later.

[00:08:20.760] – Garr Punnett

I so appreciate, I think, the probably many dollars worth of free assessment you just gave us. From that perspective on the social impact. Well, I guess sort of carbon-related metrics on even our beginning of our journey. I’ve never really thought about what it means to have even though it’s minimal, incremental maybe to comparison to a lot of other companies that we still almost get to drive like a–this is such a maybe an improper draw here on terminology–but some sort of, like, credit report sort of on our carbon, where it’s like we’re actually building up history with our carbon usage in a way where we could look back and always be like, hey, look, we’ve always been improving. These are the metrics that we have compared to what we were at a ten-person company now to what we are at a 60-person. And there’s going to be probably will always show an increase as we scale. But maybe we can drive relative use or you can start to drive metrics in ways that you couldn’t if you weren’t ever really tracking that from our stage right now.

[00:09:27.340] – Megan Murday

Completely agree. And sometimes startups are reluctant to start measuring their carbon footprint because inevitably their carbon footprint will grow. Right. They’re not a fully scaled company who can say, okay, our overall footprint is going to be 30% lower in 15 years. Their footprint is going to be considerably higher in 15 years because the company is so small right now. But we want to focus in on the carbon intensity of a dollar of revenue and that number can be driven down over time. But you can only drive it down if you have any semblance of what it is today and what the levers are that are driving that contribution.

[00:09:57.690] – Garr Punnett

So why the carbon intensity of a dollar when I’m thinking of per capita?

[00:10:04.840] – Megan Murday

Well, it could be per capita too. Managers tend to have a closer grasp of what their financial forecasts are, so it’s easier to do that projection when you’re thinking in terms of revenue, especially for companies that aren’t just software but are producing a physical product. There tends to be quite a bit of embodied carbon in those materials as well, but certainly could be per capita.

[00:10:28.840] – Garr Punnett

Again, I do love the per dollar because for us it’s the dollar spent equivalencies that we can then start to just better understand and help work down, or I guess work to be more efficient in some way. We won’t work it down. As you said, we will continue to go up. Why did this grab your attention? Why ESG in that way both at Harvard but then also just in general now when you’re really dedicating most of your time to growing this baby of a business, why is it so fascinating? Why do you love it so much?

[00:11:02.210] – Megan Murday

I think there are few things that could be more impactful at a systems level to align our financial markets with environmental and social outcomes that help create a stable economy and financial system. Companies produce externalities all of the time. We just have no sense of what the price of those externalities are. But once you price them and once you understand them, you can start to work them into the business and manage those externalities the same way you would any other cost to the company. So Carbon is a perfect example of an externality that businesses produce that is just now starting to become priced in the market through carbon credits. When we think about employee turnover, there’s a wealth of data on not just the social cost to someone of losing their job, but also the cost to the company. You have to go out and hire a new person, train them up. It takes a time period for them to come up to speed. You have to pay severance. There are externalities that are good for business in addition to being good for society. And ESG has become, I think, the biggest proponents of ESG perhaps conflated it with impact.

[00:12:11.050] – Megan Murday

ESG is not going to save the world. I agree with the economists for that. It is a data set that investors, managers, operators can use to inform their business decisions. It is not an ideology, it is not a political belief. It is just another data set. But you need this data set if you’re going to tackle any of the environmental or social externalities of business. And we live in an era of political gridlock, and I have more belief that our private sector will drive responses to climate change, to inequality much faster than we could see a federal response coming from D.C.

[00:12:50.960] – Garr Punnett

Love that. I really appreciate you also getting into almost the stigma of ESG in that answer. You must have spent time thinking about this. ESG is getting more friction. Why is that? Is that because it’s a change in sort of our capitalism structure or it’s a challenge, not a change necessarily. I believe in your answer of it’s providing more data. It’s almost saying, hey, we need to keep doing what maybe we’re doing, but we need to be better informed and we can slowly change based on the data that we have. But why is it getting this friction?

[00:13:29.510] – Megan Murday

It’s getting friction because it’s exposing risk. So it’s exposing that there are, in climate change in an energy transition, there are winners and losers. If you are a loser that stands to really, if you are a loser that stands to maybe not benefit without diversification, then you do have an interest to slow the adoption of this data set. So when we look at places that are banning ESG or trying to diminish or discredit the data set, I think it’s worth looking into connections with oil and gas companies. It’s worth thinking about who benefits from the status quo and who benefits from a lack of risk transparency. Right? We think about this in terms of diversity too. We see pushback on measurements. Sometimes we hear from climate startups, we’re saving the world, we don’t need to worry about that. And that’s not true. But if you know that your team isn’t diverse, then where’s the benefit to you in sharing that data set with your investors? Like that’s a risk and you prefer and benefit from the status quo and lack of transparency. So I think it’s not like information is a threat to the status quo insofar as it opens people’s eyes.

[00:14:46.780] – Megan Murday

And once you see things, like, you can’t unsee them. And so once we saw the extent of action required on climate, we can’t go back to sticking our heads in the sand and not moving. But not everyone has incentives to move forward because some people do benefit from the current power structure.

[00:15:04.570] – Garr Punnett

I could not agree more. I love also that you worked in and I don’t know if I’ve ever explained this, but it’s actually the origin of the name of the podcast, which is the Multiusiverse, which is, in theory, really, it was all about once. You see all of the reuse potential around you. It becomes a whole new frame, a whole new lens of which you can see the world and opens up this Multiusiverse. And so just to that point, we find that to be a challenge too that we have at Rheaply, which is we are pulling back the curtain a little bit, maybe on operational inefficiencies. And so therefore there is some friction involved where it’s like, hey, we haven’t been measuring this. Do we need to right now? Because it’s dirty and it’s like, no, we’re good with the dirt, we can help you clean the dirt. But I think it’s the best companies among us that are like, okay, look here’s. Yes, we swept up this under the rug or curtain, whatever analogy I’ve got going on, but ultimately we’re going to try to clean it up and we’re going to try to fix it and we can only do that through a data play.

[00:16:08.140] – Garr Punnett

So I so appreciate that. I think exposing risk is something that we need to keep doing also probably to make sure that our economy is running as efficiently as it can. And once we start hiding things and we start getting into fraud, then we start getting down really dangerous holes of misinformation that probably again, ESG is out there to help really guide it’s not there to be the ideology, which I love that you phrased.

[00:16:34.240] – Megan Murday

And I always tell folks too, you don’t have to publish the data the first year that you measure it, right? If you work with private companies, they’re not currently required to publicly disclose this information. So for the very reason, if you think that you might have some surprises that you’re not excited to see in the data, like let’s start measuring early because once you are mandated to report, at least then we can show an improvement story, right? It’s better to say, yes, our numbers aren’t where we would like them to be, but we’re improving 5% year over year. That’s a great story. What is not a great story is we did not measure, just kind of ignored it for a few years until someone told us that we had to look at it. And you asked me earlier and I don’t think I fully answered the question around why investors and why investors in early companies too. The data set, we typically see interest in the data set because investors want to share the information back with their limited partners. So it starts from a reporting and compliance desire, but what we see and what I think would be our best advertisement for Metric is if we could film investors looking at the data set for the first time.

[00:17:41.970] – Megan Murday

Because once you can compare your portfolio companies to each other you start to see interesting patterns or insights into who’s a leader, who’s laggard on a given KPI within our portfolio. And it’s not that they’re out to slap wrist of any of the portfolio companies, like they want to be active partners and helping them improve and it’s a way for investors to add more value too. So if you have a few companies that have built an incredibly inclusive culture, have a diverse leadership team, those are best. Like they’ve done something interesting in that startup and frankly fairly unique in that startup. Those are insights and best practices that you could spotlight and share back with the rest of your portfolio. Or if you see that everyone needs help finding an HR lead or wants to do an unconscious bias training, like you as an investor could pool resources to host, either provide some of those resources, have a negotiated rate with vendors to help support companies. So really it comes not from a desire to name and shame companies but to help them improve because ignoring and looking the other way isn’t going to solve the problem.

[00:18:46.540] – Megan Murday

But accepting the data without shame is important too and like having a more action oriented perspective is important to us and how we share back the data and how we engage with companies and investors on improving performance over time.

[00:19:00.670] – Garr Punnett

Yeah, I love that idea too that this is a leading indicator of a highly functioning leadership team or performance. Or that if a company is taking this seriously and is being able to show and benchmark progress, that that can actually be again, once VCs private equity, they’re always looking for more reasons to put money down into a company. And this can be one of those is to say, hey, we have a highly functioning team here. They get what the future looks like. We should be backing that future. And so I think that’s super powerful.

[00:19:37.310] – Megan Murday

Exactly. Because it’s not just the leadership team is highly functioning, they’re going to attract talent and high performing talent. This is such an important narrative to customers. So it started with consumer facing businesses, people who wanted to vote with their wallet back, more sustainable brands or black-owned brands, that has started to bleed into B2B companies as well, where larger scale enterprises expect their supply chains to report because they are being held accountable for what happens in their supply chain. Nike was a pioneer on that, Walmart’s doing it. Apple has just announced more supply chain transparency efforts, so it’s becoming a customer requirement for these companies too. So investors, I think, are always smart to get ahead of it and help upskill the companies in this way and agree it’s a great proxy for risk management. Thinking about balancing the interests of your stakeholders and how do you drive value for multiple stakeholder groups at once.

[00:20:35.060] – Garr Punnett

Well, thank you for both all of the free assessment advice that I got, all of the insight that you’re seeing into the ESG industry and then more specifically, the good work that you all are doing at Metric. What’s sort of a last thought that you would want to leave our audience with? What’s next on the horizon both for Metric and then ESG in general?

[00:20:57.710] – Megan Murday

Great question. So today is the midterm race for US politics. So I would say I sometimes come off as like dismissive of the public sector. The public sector has to be an important partner in the fight on climate change and solutions, addressing inequality. It is such a gift and a right to be able to vote. And so exercising that civil duty is so important. Becoming engaged, paying attention, holding our elected leaders accountable is critical for solving any of these challenges. And so yes, there is so much that the private sector can do, but the public sector has to be a partner. We saw that with the Inflation Reduction Act, we see that with local legislation all the time. So really being expressing our values, not just as consumers, not just as investors, but we need to do the same thing as citizens as well. And so what’s next for Metrics? So our vision for this platform is to be a part of for ESG data management. So we want to be supporting each startup in their ESG and impact measurement management. So as they scale the company, they’re scaling sustainably, they’re scaling inclusively and we can pay attention to what works and what doesn’t.

[00:22:10.180] – Megan Murday

So that over time we can give more and more pinpointed recommendations on improvements for those companies too. So that in 20 years we have a breed of companies that are really mindful of not just how they’re making profit, but doing so in a way that is managing all of the stakeholder groups that they’re responsible to, their customers, their employees, their investors, their communities. And so where I think ESG is headed, I think, to be frank, I think that ESG will continue to become politicized. I think that we’re in a very politicized era and a lot of just so much political fragmentation coming around us. But we’ve already seen the largest financial actors double down on ESG. Not as an ideology, just as a data set, and if anything, it’s an important part of an investor’s fiduciary duty to include in their assessment. So I think that ESG is going to weather the storm, but I think that we’ve got some explaining to do ahead. So I’m interested to see whether the three environmental, social and governance stick together if we start to move into a sustainability and diversity mantra. But I don’t think anyone wants yet another acronym to replace our alphabet soup.

[00:23:24.940] – Garr Punnett

Yes, exactly. For those who don’t know what Carta is, look it up and then you’ll get to really understand the cool statement that you had of being the Carta for ESG. I think that’s a fantastic mission. Thank you, Megan. Thanks so much for the time today.

[00:23:39.810] – Megan Murday

Thanks so much. Appreciate it.