This article is the first of a two-part blog series looking at technology's unique intersection with ESG. In the first blog, we’ll look at technology solving ESG challenges. The second part examines technology as an ESG risk.
Over the past decade, Digital Transformation has captured the minds of business leaders. Never before in the history of humanity has digital technology intersected so closely with every aspect of our lives. Since 2020, this concept has accelerated as the world has come to terms with rapid change around COVID lockdowns and remote work, supply chain disruption, severe weather events, and social justice movements worldwide. Digital Transformation is now inextricably linked to another accelerating movement – Environmental, Social, and Corporate Governance (ESG), and the journey toward what we’ll call Sustainable Transformation.
ESG grew out of investment philosophies designed to index the sustainability and social responsibility of a company, both as an investing screen and as a way to analyze and improve operations and reduce risk. The ‘E’ generally covers energy efficiency, carbon footprint, biodiversity, pollution mitigation, and water and waste management, and the ‘S’ generally covers labor standards, DEI, health, and safety, and social justice issues. The ‘G’ captures the governance of both of the above, as well as corporate citizenship.
ESG is driving many transformational efforts today due to stakeholders (not only shareholders) taking greater interest in how companies address ESG risks and opportunities.
For example, as stakeholders, employees might mitigate a supply chain risk that surfaces from climate change to keep business operations consistent for customers. In this example, technology plays a direct role in helping a procurement team examine physical supply routes against climate models built on weather data and AI models. However, while technology is the enabler of the insights, it too can become an ESG issue with risks and opportunities, as we will see in part 2 of this blog series.
The concept of ESG having a fourth pillar for technology isn't new. Dr. Andrea Bonime-Blanc addresses this idea in her book, "Gloom to Boom." In it, she openly admits to not being a technologist but also pins technology at the end of ESG as ESGT. Let’s pick up this idea and explain the intersection of technology with ESG from a technologist's perspective.
A diagram showing ESG challenges and technology as its own ESG pillar
Technology Solving ESG Issues
Technology advances, if applied effectively, can often improve the ESG of existing enterprises. For example, all companies with physical operations can deploy tools like water metering, LED lighting, and efficient waste management systems to be responsible custodians of natural resources. In addition, recording and reporting through a tool like the Microsoft Cloud for Sustainability can be a powerful way to understand your company's impact and progress toward climate objectives , as a tool that can be used to drive systemic change.
Applying technology to ESG issues helps stakeholders understand and address material risks and opportunities. Materiality in this context means decision-useful information around the company and the ecosystem in which it operates (see the below chart for other definitions). Supply chains are a great place to illustrate technology's material ESG impact. For example, severe, point-in-time weather crises and longer-term climate risks will disrupt supply chains. These events impact the timely delivery of goods to customers and lengthen the cash conversion time. Pivoting to another example, forced labor or other human rights issues in the supply chain can damage a brand's reputation, potentially angering customers. The first example is a material environmental issue, while the second represents a material social concern.
The four types of materiality
Technology can play a role in solving both challenges. In the first case, satellite and geospatial imaging combined with AI and climate modeling can help uncover the propensity of a severe weather event or a long-term impact on a supply route. Then, logistics teams can leverage that information to re-route supply lines well in advance, helping to protect their sales and the downstream logistics company.
In the case of forced labor or other human rights concerns, something as simple as technology that allows for open collaboration and transparency between company and supplier can go a long way. Business leaders in one country trying to monitor the situation with a supplier in another country could keep the lines of communication open with modern collaboration tools, like video calling, and even conduct remote inspections in virtual reality. In addition, traceability of fabrics, dyes, and other fashion elements from sourcing to the store can help boards attest to the process as items move through the supply chain. Technologies like Blockchain can be leveraged to convey this information to consumers, resulting in insights that minimize risk.
Supply chains aren't the only area that technology can help. You are likely using a tool every day to help understand your employees, one of your most important stakeholders. Office 365 is a fantastic collaboration tool, creating collaboration and productivity signals into the Office Graph. Leaders can use this information to mitigate employee risks, like burnout, or measure the effectiveness of Employee Resource Groups (ERGs). We've even created a tool to help leaders leverage this information responsibly, called Viva Insights.
Customers are a critical area to focus on when uncovering ESG risks. One unhappy customer with a large social media or viral post following can have a double material impact on the company. In 2009, United Airlines baggage handlers damaged a musician's guitar. In the following days, $180M had been wiped out from their market value. Correlation isn't causation, but it is still an interesting example of how customers are stakeholders in your business. Tools like Dynamics Customer Insights and the increasing importance of social media sentiment analysis are critical to head off issues like this.
These solutions build on the concepts of Digital Transformation, which layers digitization, network connectivity, and new experiences for a business's employees, customers, products, and operations. applying these tools to enable Sustainable Transformation: driving business resilience through technology while addressing key ESG issues. (see Accelerating Sustainability with ESG Insights, page 11 for more information)
In these examples, the application of technology transforms the business around its risks and stakeholder interactions to address ESG challenges. When stakeholders are brought together with internal and external data from supply chain routes, NGOs, community news, large-scale planetary data, a company can pull out that decision-useful information to make more informed decisions.
Taking Steps to Solve ESG Challenges with Technology
There are two basic steps to take to identify ESG challenges. First, a company can map out its stakeholders and examine their impact and influence. This basic mapping exercise will help business units and leaders understand the intersection of the stakeholders to the risk and opportunities they present. In the example graphic below, notice that the stakeholders I mentioned above are stakeholder categories. You may have several stakeholders underneath, each with unique impacts, influence, and value creation.
Charting stakeholder categories to stakeholders and their impact, influence and value creation
The next step is to think about where and how technology intersects with your stakeholder interactions, operations, and products or services. Making a list is a great place to start, but boards will quickly need to pull in business unit expertise to break their assumptions, prioritize, and understand the impact.
For ESG and technology issues, a Materiality Matrix can be helpful. We published a Materiality Matrix in our 2020 Environmental Sustainability Report, including the methodology used to create it (Appendix C) if you need inspiration.
Thinking about your stakeholders and their intersection with your material issues will put you on decent footing to begin addressing the risks. But, of course, technology is not a panacea, and its application must include people who are empowered to act on behalf of the company. In other words, a company will not benefit from a Procurement Team that has the data, is looking to optimize routes, or switch suppliers due to a Social risk but isn't empowered to act on the information.
The insights and risk mitigation that technology brings are only as good as the outcomes it drives. Still, technology plays an important role in solving ESG challenges in an ever-increasingly digital world.