ESG and technology: impacts and implications
June 24 2021
by Chris Marsh, Simon Robinson
How to effectively treat environmental, social and governance issues – collectively known as ESG – is shaping up to be one of the most significant questions of the decade for businesses and investors
. Although major commitments are being made in company boardrooms, the ESG mandate is challenging to embrace. The role of technology in particular is underexplored, yet it has an oversized potential to influence the mandate. All actors are trying to understand the implications, so we anticipate the range of discussions around technology and ESG will rapidly become more frequent, specific and strategic.
This report is drawn from a longer piece of research recently compiled by analysts from across 451 Research's different research practices. It outlines over 30 important technology trends, and looks at how they impact each of the E, S and G dimensions. Included in that longer report is analysis of the potential impacts from the rollout of 5G, artificial intelligence (AI), the cloud, customer and employee experience technologies, cybersecurity, datacenters, data management and analytics technologies, IoT and other enterprise technologies. Here, we highlight some of the overall implications from the growing interest in the ESG mandate for consumers, technology buyers and IT end users, as well as for technology suppliers.
The 451 Take
ESG has emerged as not only one of the hottest issues of our time, but potentially one of the most transformative, for both industries and societies. As a result, we expect ESG to become a growing part of the information technology industry narrative over the coming months and years. As we show in this report, the impacts and implications of ESG on technology are both wide-ranging and material – in fact, there is almost no area of the segment that will not be impacted or will not have a role to play in shaping the future. Some of those effects – such as the building of sustainable datacenters – are more obvious and compelling. However, technology will also play a more subtle role across a much more expansive palette of ESG factors over the coming years that collectively will help drive industry and societal change. 451 Research will continue to explore these trends to help clients understand their implications on the ESG landscape as they evolve.
ESG: Important but a challenge to embrace
ESG is becoming a major strategic imperative, especially for large and public organizations. In the boardroom, we're seeing companies make long-term commitments to address climate change – the 'E' in ESG. The pandemic and social justice movements cast more of a spotlight on the 'S' in ESG, and as a result we've seen more companies taking action to address social issues like worker safety; diversity, equity and inclusion (DEI) policies; and systemic racism.
In addition to external pressures to address ESG issues, more businesses are also realizing the benefits of embedding ESG criteria in fundamental business practices to reduce their exposure to a range of risks, to improve their baseline performance and to create businesses that will be sustainable over the long term. Some of the biggest investment funds set up with ESG criteria outperformed the broader market early in the coronavirus pandemic. More than half of the ESG-linked funds included in a new analysis by S&P Global Market Intelligence outperformed the S&P 500 in the first several months of 2021.
But the ESG mandate presents many challenges for companies: The topic is broad and complex. Many competing frameworks and standards exist around the globe. What's more, the rules around ESG are very much in flux as regulators worldwide debate what disclosures are mandatory. This lack of standardization means that available data is often patchwork.
These challenges present an opportunity for the technology industry. All actors – including investors, consumers, technology buyers, and their end users and suppliers – are trying to understand the impacts and implications of ESG and what it means for how technology is used. For all these reasons, we anticipate that the range of discussions around technology and ESG will rapidly become more frequent, specific and strategic.
Implications for consumers
Momentum around ESG has grown as businesses look for ways to mitigate reputational and business risks in the face of growing pressure for more socially conscious practices. These risks have intensified in subsequent years, with wider social changes manifesting in a new consumer ethos. ESG issues are not only becoming more prominent in individual purchase decisions, but the whole value chain – from sourcing to product to packaging to reputation – is being influenced by growing consumer interest in sustainability, DEI and fair trade.
There is significant risk yet substantial opportunity for brands in the growing focus on ESG issues. One potential upside is that for many businesses, improving their customer experience is among their most important digital transformation priorities. The kinds of things they are focused on – namely operational effectiveness, customer service responsiveness, and data protection and privacy – are becoming more important factors in social and governance measures. If businesses manage to align around both the ESG mandate and their customer experience strategy, they should be able to realize significant synergies and pass the benefits on to consumers.
Implications for technology buyers and IT end users
For most businesses, however, understanding the implications of technology adoption for ESG strategies is still in the early stages. Only 29% currently have a formal ESG strategy, according to HR leaders surveyed in 451 Research's survey. Even among those that do, most are unlikely to be measuring the ROI of their strategies – it's common to see it as an important cost of compliance rather than delivering a business return.
The majority of businesses do not apply an ESG lens across their technology investments, and relatively few technology providers strategically market ESG credentials around their products, services and engagement models, although this is beginning to change. Where there is existing commitment on the buy side, it's typically from an ethical procurement perspective – that is, businesses wanting to demonstrate they are working with suppliers that take issues of sustainability seriously.
However, pressure on boardrooms and the c-suite to commit substantially to ESG goals is growing. For example, the US Securities and Exchange Commission (SEC) created the role of senior policy adviser on climate and ESG and beefed up its examinations of whether companies' business continuity and disaster recovery plans are factoring in extreme weather threats. The SEC also launched a review of corporate climate-related financial disclosures and has increasingly signaled that a new regime of corporate disclosures around climate and ESG risks is coming. As Wall Street's top regulator, the SEC plays a critical role in determining which disclosures are mandatory and how companies engage with their shareholders.
One of the questions businesses will be asking themselves is: Where to start? They are increasingly reliant on their digital infrastructure running their operations, and the digital experiences they provide their employees, partners and customers. For large enterprises, this likely amounts to hundreds, if not thousands, of individual technology supplier relationships and a growing number of digitized business processes. This dependence widens the scope of the threat vectors and risks to be managed. With new ESG commitments, businesses will need to understand whether their existing risk management and other governance controls will be effective.
At the same time, technologies will underpin new products, processes and practices to support more data-driven decisions that will help mature ESG commitments. They will also provide the basis for new kinds of relationships with employees and customers, through which commitments to good practices can be made more material.
Growing expectations to understand the energy efficiency of both hardware and software assets will improve the measurement and reporting of environmental impacts. Many businesses will have learned from their digital transformation strategies how to lower organizational boundaries and drive alignment, which can also support the maturation of other companywide agendas, such as ESG.
Another important starting point will be around DEI. The IT department at the typical enterprise is not the most diverse environment from any perspective. However, a recent 451 Research study finds that 2020 was a watershed year for DEI issues: Half of survey respondents report that their organization expanded their commitment to DEI during 2020, with around three-quarters having formal commitments to increase DEI in their workplaces overall. Formalizing the importance of DEI is an important step that makes organizations more accountable for results and outcome.
Ultimately, as more businesses commit more strongly over time to the spirit (and not just the letter) of ESG – promoting stronger fairness, inclusivity, reliability, safety, transparency, privacy and accountability across their organizations – technologies will be a crucial determinant of how successful they are.
Implications for technology suppliers and service providers
The technology (and IT) industry itself is no different from other segments here – it is collectively placing a renewed emphasis on various aspects of ESG, with several of the large technology vendors 'recommitting' or updating their ESG mandates over the last year. The industry will have particular importance in the role ESG plays in the longer term for several key reasons.
It has an outsized impact on the 'market cap' of the market overall – constituting 26% of the S&P 500 (as of May 28, 2021), more than double the next sector – giving it particular significance for the increasingly ESG-minded investment community at large. It is a significant employer globally and has a central role in transforming society through the creation of the digital economy – it needs to be a leader by example here. The industry is also challenged by the growing interest in sustainability and social equity; it needs to become more diverse, inclusive and reflective of the societies that big tech serves.
For example, a 2020 report by S&P Global noted that although growth in women's representation on boards and c-suites at tech companies has increased worldwide in the past 10 years, there is still a long way to go. The report found that women occupy less than a fifth of spots on boards of directors at tech companies – less than for the financial or industrial sectors. Additionally, the report found that companies with more women in the IT department tend to be further along with their digital transformation efforts, and that economic modeling suggests greater gender diversity is linked to stronger financial performance.
The IT industry is also a significant contributor to the global carbon footprint, and almost 60% of IT industry emissions come from the downstream use of products by customers, according to S&P Global Trucost data (based on the S&P Global 1200 Index, as of November 2020). This explains why it's also at the forefront of the corporate push for green energy globally, with the big five tech companies (Amazon, Apple, Facebook, Google and Microsoft) all setting targets to use 100% renewable energy. Microsoft plans to be carbon-negative by as early as 2030.
The datacenter industry also deserves mention here. As more organizations offload the data and services their customers use into cloud computing infrastructure, the datacenter providers supplying key parts of that infrastructure are consuming significant amounts of energy. While their power consumption is increasingly being shifted to green sources, some elements of their operations are more difficult to switch. This challenge will drive innovation and make datacenter operators increasingly sophisticated players in the power markets.
As businesses organize around their ESG commitments, they will increasingly want to know not just that their suppliers take sustainability issues seriously, but that the technologies and services they procure can directly support their own strategies. Suppliers will need to be clearer about the business return their customers can experience from using their technologies. Any tradeoffs between, for example, performance and energy efficiency will need to be made explicit.
Increasingly, sustainability-conscious customers will identify attempts to 'green wash' products and services. Suppliers will need to partner with their clients and meet them where they are in their ESG journey – which, as adoption matures, may mean getting to know their customers anew.
Among the more than 30 important technology trends we identified in the longer version of this report, the following findings were some of the most informative:
Datacenter efficiency. Half of datacenter operators say their investment in sustainability initiatives is being driven by customer interest, according to a global survey by 451 Research in 2020. The majority of service providers expect sustainability to become a key competitive differentiator in three years.
Ethical consumerism. Around a third (35%) of respondents in 451 Research's survey say they are more likely to purchase electronic devices produced using environmentally sustainable business practices, and 87% percent of these respondents are also willing to pay more for such a device.
Talent strategies. Technologies are playing a growing role in employee engagement strategies. Thirty-five percent of employees would accept a new job if the only way it differed from their current job was better availability of devices, applications and other productivity tools, according to our survey.
Supply chain governance. Manufacturing companies are using digital twin and digital thread processes to shore up their supply chain governance: 68% have partially or fully deployed them across their operational systems, according to our survey.
Bias in AI. Sixty-six percent of organizations with AI deployments are testing their models for bias either prior to or after deploying, according to our survey, illustrating the strong push for ethical and responsible AI.
Consumer data privacy. Nearly half (46%) of consumers have reservations about sharing their personal data online, yet only 8% of businesses report having a dedicated data privacy team that has primary responsibility for data privacy and data protection, according to our 2020 surveys.
Dependence on 'smart' technology. 451 Research shows the number of IIoT services nearly doubling over the next five years – with billions of smart devices proliferating in consumer, retail and industrial markets – so there are clear and growing environmental, social and governance risks across almost all aspects of human existence.
Understanding these and the other technology trends we detail in our longer report will be essential for anyone serious about ESG. Businesses and their technology suppliers, technology and corporate investors, regulators and public policymakers will all need a more comprehensive and nuanced view in the coming years around how the technology choices that businesses make can impact their ESG goals.