According to financial services firm Refinitiv Lipper, global Environmental, Social and Governance (ESG) funds received $649 billion in investments in 2021, up from $542 billion in 2020.
In a CNBC interview in October 2022, Microsoft’s Bill Gates said businesses that exaggerate ESG credentials and argued that even though corporate sustainability credentials are often controversial, they are critical for assessing whether to invest in a company.
In October 2022, a KMPG survey reported that global CEOS are putting ESG goals on hold to prepare for the recession. The report noted that while they are still committed to investing in transformational opportunities for their future growth, 59% said they will pause or reconsider their ESG efforts into Q1 2023.
ESG has some wrinkles because of several issues, the definitions of ESG vary, a lack of standards and measurement models, marketing hype, and in some cases, political pushback. In a July 2023 investment article in the Economist, A Broken Idea: ESG Investing posited that what was once a touted investment strategy has become less measurable or achievable.
The KPMG report says that despite the pause, the business case for ESG is still positive. But in the theme of the Economist article, the KPMG report also 70% of the global CEOs said that their company’s ESG programs did improve their financial performance.
Bruno Sarda, Climate Change and Sustainability Services leader at EY, tells a different story. According to their latest EY CEO Outlook Pulse Report, 34% of the CEOS in their survey said that the impact of climate change and the pressure to build sustainability was the most significant risk to their business growth.
“With the rise of regulatory requirements, reporting on this data faster and more accurately will only continue to grow in importance – particularly against the current recessionary pressured economic environment,” said Sarda.
But Sarda says the path to sustainability for most sectors will be through technology.
“In this sense, the technology sector has an outsized role to play in helping almost all other sectors with their ESG tracking and measurement, as well as with effective change,” said Sarda. “Overall sustainability progress will be helped by technologies like IoT, edge computing, digital twinning, blockchain and other new types of software architecture that track end-to-end emission flows across networks.”
Sarda says that just like many other technology applications, the quality and consistency of the inputs dictate the quality and usefulness of the outputs. So, in addition to adopting new technologies, Sarda believes that companies will need to improve data quality and management controls and processes.
One barrier Sarda says organizations face with realizing their ESG agenda is being able to act effectively on the data they gather. “For example, some organizations use technologies that track in detail their use of electricity, but it’s not until they implement energy efficiency measures or renewable energy strategies that they will achieve the associated savings and carbon reductions,” said Sarda.
According to Sarda, two categories of technologies are significant to advancing environmental ESG initiatives and impact. “One is a set of upgraded technologies that companies can deploy and implement to manage and track their ESG programs, and the other is a set of technological tools that will help these companies deliver on their environmental goals.”
“The bottom line is that implementing tools to manage better ESG reduces risk and increases velocity (speed to market), as well as reliability and trackability,” said Sarda. “With the rise of regulatory requirements, reporting on this data faster and more accurately is very important, and for most organizations, pursuing environmental gains yields positive financial impact.”
Sarda says that realizing ESG goals through the intelligent use of technology helps corporations stay competitive as well as compliant. “This means that implementing these technologies helps them to reduce waste, including wasted energy, carbon, etc., and reduces costs in the short- and long-term,” said Sarda.
The startup equation
Shifting from large corporations to startups, a World Economic Forum report in October 2022 highlighted that startups have been, for the most part, left out of the discussions for ESG. Venture capital firms have led those discussions.
The report noted three critical takeaways for startups looking at ESG, including ESG metrics friendly to startups. Most standards in the market are focused on corporates with dedicated resources, making it difficult for startups to track those metrics. More than 68% of startups said ESG should be embedded into their business strategy before most even had a viable product, complete C-suite, or office space.
Sarda agrees that ESG frameworks and practices evolved to help large companies better measure and visualize the reach of their impact on environmental and social issues and align their values and reallocate resources to ramp up their ESG efforts.
“But startups are at a unique advantage – they are smaller and more agile so that they can embed ESG practices directly into their company’s DNA from the start,” said Sarda. “Establishing ESG as a core value from the beginning helps avoid additional cost and internal restructuring down the line and can be key to their growth and success.”
“This also positions and differentiates the company as innovative and ESG-conscious when many large companies are slower to make ESG a priority,” said Sarda.