Abate! How to avoid the scaling trap.

As a startup you should generally not encounter substantial sustainability-induced business risks. But you might once you are scaling up. That’s what we call the scaling trap. Path dependencies that come to light when you’re scaling might result in an operating model that might lose its benefits, efficiency, legitimacy, or even legality once you develop a substantial footprint. Here is how you avoid the scaling trap.

Externalized and external sustainability risks

With sustainability becoming more and more relevant for consumers, capital providers, regulators, and (future) employees alike, the retroactive consequences of externalized risks become increasingly relevant.

Externalized costs (e.g. the societal consequences of climate change resulting from company-caused emissions or the individual burdens caused by human rights violations in supply chains) start to become “re-internalized”. Just think about emission certificates that energy-intense companies suddenly needed to pay for or consumer boycotts of fashion brands not caring enough for human rights in their supply chains.

At the same time, with social and ecological crises worsening, the number of external sustainability risks is also increasing. Investors divesting from stranded assets, floods disrupting supply chains, global heating tightening resource scarcities or social injustices shaking up established structures of global division of labor – you name it.

List and categorize the risks for your material sustainability issues

While mapping out your ecosystem and running the materiality assessment you surely have already come up with a list of potential sustainability risks for your startup. Now categorize them as to whether they are purely external risks (i.e. risks that happen to you without any of your doing) or externalized risks (detrimental impact on third parties that you are responsible for). This differentiation is helpful in order to better manage these risks.

Know which externalized risks you need to avoid

Negative impacts you might have on others (e.g. the environment, your employees, your customers, people in your supply chain, etc.) will most certainly weigh more heavily on you than external risks – because they are attributable, measurable, and – in most cases predictable. The fact that – as a startup – you can foresee the potential trouble that particular path dependencies might lead you to, can be a strong competitive advantage. Contrary to established players it is much easier for startups to avoid – for example – carbon dependencies or the restructuring of already established supply chains for their lack of ecological or social performance.

But in order to avoid risks resulting from externalized impacts, you firstly need to know what, where and how big your impacts are or could eventually become while you continue growing your business. And here is how you can do that:

Firstly, get back to your list of material issues that you have differentiated into opportunities and risks, and verify if the risks you’ve found are exhaustive. Luckily, you can do that very easily by checking out the sector specific-guidelines of SASB – the Sustainability Accounting Standards Board – that has defined the major impacts that each industry might have and that could backfire on them.

The SASB Materiality Map

For each industry and subsector SASB has – in a yearlong multi-stakeholder process – identified those sustainability fields, where companies of that particular sector usually externalize their impacts and that are thus likely to affect the financial condition or operating performance of these companies: Materiality Map

Now gather all the risks that you consider relevant enough to address. Together with the sustainability-related business opportunities, you are now equipped to develop your strategy to create a real and lasting impact!