How the Tech Sector is Measuring ESG Impacts
Plenty of industries have to step up their ESG reporting and disclose data regarding Environment, Social, and Governance (ESG) criteria. But ESG puts especially tech companies in the spotlight for weaknesses and opportunities to capitalise on their industry advantage.
While tech companies are increasingly aware of ESG related issues and the topic has rightfully claimed its spot in boardrooms, actual ESG performance is mostly inconsistent. In many companies, there is still a big gap between ambitious commitments and concrete action. In fact, 451 Research, a part of S&P Global Market Intelligence, surveyed HR leaders, with the result that, overall, only 29 % have a formal ESG strategy in place.
Grant Thornton conducted a CFO survey for the third quarter of 2021 that highlights the importance of ESG in corporate decisions. The results showed that more than half (57%) of all respondents found that ESG had become more of a priority since the beginning of 2020, while 87% stated ESG to be “a major consideration, equal to financial success, or a fundamental business driver” for them. Zooming in on the E of ESG, 86 % of global tech executives think that the tech industry needs better regulations and higher standards when it comes to sustainability and energy efficiency. And the Boston Consulting Group named the tech industry a frontrunner on ESG in a report from 2021.
Yet, the rise of ESG goes beyond the tech sector. The Taskforce on Climate-related Financial Disclosures (TCFD) concluded in a study that 60 out of the 100 largest public companies in the world are in favour of increased disclosures, a trend that will continue to expand in the future. In this article, we will present you opportunities and pitfalls, as well as a how-to guide on how to start an ESG strategy as a tech company.
How and Why is ESG important for Tech Companies?
The challenges of ESG in Tech
1) Growth needs a societal purpose
Long-term success no longer purely depends on financial growth. KPMG reports that 57 % of tech company CEOs agree that they must focus beyond financial expansion for sustainable success. But more than half struggle with connecting their tech company’s growth strategy to a societal purpose.
2) Starting early and thinking big
Ideally, ESG is at the core of any tech company from day one, rather than allocating resources to ESG only once a company reaches a certain size or stage. A solid ESG approach is scalable, addressing questions when they emerge, parallel to growth. “If you’re private, act like a large public company. The sooner you design ESG into your organisation, the less exposed you are, especially if you scale at a rapid rate”, says Mark Lemon, Grant Thornton’s senior manager for ESG & Sustainability.
The impact of ESG on financial performance
1) ESG investing is increasing
- In the future, financial decision-makers demand more from companies and will prioritise sustainable investment solutions.
- Regulatory organisations and governments are increasingly integrating sustainability into investment information and decision-making.
- ESG research and analysis have the potential to identify investment risks and create excess returns.
In 2020, US Sustainable Funds outperformed traditional funds by 4,3 percentage points, according to the Morgan Stanley Sustainable Reality Report. They also navigated the market volatility better than traditional funds, making sustainable funds more reliable for investing in times of stress.
ESG capital allocations have reached a record high of $17.1 trillion - a third of $51.4 trillion in total managed U.S. assets. By 2025, ESG assets even have the potential to reach $50 trillion. As a result, implementing an ESG strategy and transitioning into becoming a sustainable tech company can directly increase funding and investing.
2) A strong ESG proposition correlates with higher equity returns
Companies that perform better on ESG criteria, perform better overall. Research conducted by McKinsey states that ESG performance links to reduced downside risks due to lower loan and credit default swap spreads and higher credit ratings.
McKinsey also investigated why strong ESG performance links to value creation in the financial sense. Their experience and research shows that there are 5 key connections between ESG and cashflow: facilitating top-line growth, reducing costs, minimising regulatory and legal interventions, increasing employee productivity, and optimising investment and capital expenditures.
3) Green technology turns into direct revenue for Tech
While the tech industry has an industry advantage, leading to good ESG ratings and plenty of potential for the future, companies can benefit beyond their own ESG performance. ESG strategies will rely on tech products to gather, measure and analyse data. Therefore, integrating ESG into existing tech products to support your clients can create a direct revenue line. One example is the market for IoT sensor deployment for the establishment of smart cities, which is, according to BCG, a $400 billion market.
The impact of ESG on stakeholders
1) Customers demand ESG commitments and disclosures
FedEx, Microsoft and Unilever are just a few of the big clients for the tech industry that require ESG disclosures. According to the Boston Consulting Group, this spills into large deal bids of the industry as well. Since 2020, ESG is a key differentiator for many Tech RFPs - and it will probably become even more important in the future.
Andrew Duncan, partner and UK CEO at Infosys Consulting states, “...consumers are demanding more traceability and to know the full lifecycle of a product. Reporting on ESG KPIs can prove a differentiator amongst these customers, who look to do business with an organisation that has tangible green credentials.”
2) ESG is necessary to avoid risk and navigate regulation
McKinsey states that 30 % of corporate profits face risk from state intervention - even though the impact of regulations vary by industry, for the tech sector, where government subsidies and other interventions are frequent, the risked value can be up to 60 %.
Sustainability reporting has often been voluntary in the past, but now ESG disclosures are becoming mandatory for many industries across developed economies, with multiple frameworks like the TCFD or Climate-Related Financial Disclosures being developed.
And while governments have not yet introduced regulations specifically for the tech industry, the technology-heavy Nasdaq exchange has already established ESG requirements.
Trading companies have to appoint two diverse board directors, one must identify as female and a second who identifies as a racial or ethnic minority or as LGBTQ+. Businesses who do not comply, need to publicly disclose that they are unable to include diverse board directors.
Bloomberg published insights that out of 300 Nasdaq-traded companies, 37 % lacked a racially diverse director,12 % of companies had no women on their board, and 8 % did not include any racial or gender diversity within their board of directors.
How Tech Companies can Develop Their ESG Strategy
1) Identify your specific ESG approach
Tech companies implementing an ESG strategy must set their focus and be committed to transparency. Defining clear, realistic and relevant ESG goals is the first step. To hold oneself accountable, choose tools for measuring and tracking the ESG factors you decide to focus on.
2) Find areas of impact
Your obtained data will be the starting point of your ESG strategy, connecting a weakness with an actionable plan to improve. For example, you start by measuring your power consumption and greenhouse gas emissions. Then you pick an area to decrease those stats, like an electricity saving policy for your office or optimise your computing workloads.
In order to give your ESG strategy more purpose, connect your efforts to your overall business performance. Reducing power consumption, for example, decreases your costs and can improve your tech company economically.
3) Evaluate your efforts
While it might still be uncertain what ESG regulations in the tech industry will look like in the future, developing a measurement and reporting structure early on will ease requirements in the future and increase your attractiveness to investors and stakeholders. Nevertheless, be aware that your ESG process might not be entirely flawless and unrealistic goals can backfire. Instead, focus on logical planning and use potential failures to adjust your strategy.
Any future-proof, forward-thinking tech company will integrate ESG policies into their business. With the constant increase of regulations and expectations from stakeholders, it would be advisable for you to start sooner rather than later. Are you looking for a time-saving, efficient way for your tech business to benefit from a solid ESG strategy? Feel free to reach out to us to schedule a demo with one of our experts.