Environmental and social governance, or ESG, is a growing concern for business leaders—and for government regulators, investors, and standards bodies. Recent events have only increased the business world’s focus on ESG: worker wellness has become a major concern during the COVID-19 pandemic; social justice protests have drawn attention to gaps in diversity, equity, and inclusion; and the impacts of climate change and the importance of environmental sustainability are becoming harder, if not impossible, to ignore. It’s time that IT organizations and digital technologists recognized the role they can and must play in supporting their companies’ ESG efforts.
The critical thing to understand about ESG is that it is a strategic concern of businesses, not just a nice-to-have activity that occasionally pops up on a C-suite agenda. A business’s long-term survivability depends on a broad range of stakeholders in addition to its shareholders, just as it depends on the business’s ability to master the digital economy. In fact, a company’s medium-term (and even short-term) success in our fast-paced environment depends on making good decisions around environmental and social considerations. For this reason, focus has shifted from just doing good—what we call corporate social responsibility (CSR)—to setting up governance processes to build these activities into the fabric of the corporation’s activities. ESG is CSR raised to a strategic priority, bringing transparency and accountability into the company’s environmental and social impacts.
Why ESG Is an Important Board Concern
According to a Fortune 500 company board member, “companies are recognizing that taking care of broader stakeholders in the business over the mid- to long-term is a good thing for the long-term sustainability of the business.”1 Forty-five percent of board directors now say that ESG is a regular part of the board’s agenda (up from 34% in 2019).2 Eighty-two percent rank being a fair employer and good corporate citizen as “extremely” or “very” important.3
Environmental and social governance directly affects business performance: companies on the S&P 500 ESG Index outperformed, suffered fewer losses, and recovered faster than the S&P 500 during the pandemic.4
When a company’s board members are focused on a topic, senior executives are as well: 56% of US-listed companies whose market capitalization is over $25 billion have put ESG measures into their incentive plans.5 No surprise, then, that 48% of CEOs are implementing sustainability into their operations.6 ESG initiatives get translated into concrete business objectives: Verizon, for example, aims to spend at least $5.2 billion of its supplier spending on minority- and women-owned businesses. Verizon also plans to reduce its carbon emission intensity by at least 10%.7
Investors rightly consider ESG in making investment decisions, acknowledging that the long-term returns from a business depend on it. And this, in turn, leads to new efforts to set standards and promote transparency. The Business Roundtable, of which Amazon is a member, has revised its governance principles to include corporate stewardship. The SEC now requires disclosure of material human capital metrics. Rating agencies such as S&P Global, MSCI, Institutional Shareholder Services (ISS), and Sustainalytics provide ESG data on companies. And the AWS Open Data Initiative and AWS Data Exchange make ESG data easily available to investors. A number of organizations are setting standards, including the Sustainability Accounting Standards Board (SASB), the Global Reporting Initiative (GRI), the Carbon Disclosure Project (CDP), and the Task Force on Climate-Related Financial Disclosures (TCFD). In 2019, 90% of the companies in the S&P 500 index published a sustainability report, up from only 20% in 2011.8
Boards must oversee ESG because of its importance for the long-term survivability of the company. The board’s audit committee must see to ESG disclosures and transparency and ensure that appropriate processes and controls are in place. The compensation committee must set incentives, ensure accountability, recruit and retain diverse talent, and look after the company’s ESG culture. The nominating and governance committee must address the composition of the board and ensure that it stays engaged and educated on ESG matters.9
IT, Digital Technology, and ESG
In our digital world, technology both drives the increased focus on ESG and plays a critical role in implementing ESG initiatives. It is the increased transparency that technology has brought that makes it possible for stakeholders to press companies to address their needs and for investors to evaluate companies on their ESG performance. And IT has become central in enabling the company to meet its ESG goals.
You can almost think of ESG considerations as engineering parameters. Take environmental sustainability, for example. Each piece of code that engineers develop will have a carbon impact each time it is executed. Just as engineers can optimize their code for speed and scalability, they can also optimize it to minimize that carbon footprint. The cloud provides tools that can help with this. But the impact of IT on environmental sustainability can go well beyond reducing the carbon footprint of running code. If the company has manufacturing equipment, sensors and machine learning can help monitor and adjust machine performance to minimize its environmental impact, for example. And if the company runs a fleet of delivery vehicles, technology can be used to optimize routes to use as little fuel as possible.
Environmental sustainability is just a part of ESG; IT has a role to play in most of the other important social and environmental goals of the firm. It is involved in product quality and safety, employee wellness, and inclusion and equity in the company’s products and services. IT departments must address their own issues of employee diversity, inclusion, and equity.
The role of IT in ESG is so extensive, in fact, that it deserves its own blog post…which I will follow up with as soon as I can. As I’ll show, IT is not only a critical locus of ESG implementation, but can cause a ripple of ESG impact to spread through the company. As technology leaders, we must step up to drive change that is both socially beneficial, and important to our companies’ strategies and long-term viability.
1 Quoted in Melanie C. Nolan, “What Directors Think 2021” in Corporate Board Member (24:1, First Quarter 2021) p. 37
2 PWC, “ESG Oversight: The Corporate Director’s Guide,” November 2020, p. 14 (pwc.com/us/ESGguide)
3 Nolan, p. 37
5 “ESG and Incentive Plans” in Corporate Board Member (24:1, First Quarter 2021) p. 9.
7 “ESG and Incentive Plans,” p. 9.
9 These committee roles are largely drawn from PWC’s “ESG Oversight: The Corporate Director’s Guide,” p. 15.