Marjella Lecourt-Alma
Tech companies have historically been viewed more positively than other sectors when it comes to ESG issues, but over the past 24 months, impending climate-related regulations, and the rapid move toward greater accountability has meant that many tech companies are left exposed.
Issues such as energy consumption, workforce diversity, human capital, security, data privacy and political misuse of platforms are just some of the growing ESG challenges tech companies are facing.
In addition to preparing for regulations from the SEC and the EU’s Corporate Sustainability Reporting Directive (CSRD), tech companies also face risk of reputational damage from the latest crackdown on greenwashing.
How big is the problem?
The most common topics referenced by U.S. tech companies in their financial reports include public health (ranking No. 1, a hangover from COVID-19), security (coming in second) and privacy (third). Climate change and risk management (33), GHG emissions (43), human rights (53) and biodiversity (81) have a lower priority and appear further down the list.
For European companies, GHG emissions is in the top 20 most emphasized ESG topics, ranking 12th in order of priority. But, as this is the most regulated environmental theme, it does not signify a strategic approach to ESG. Climate change and risk management (22), and human rights (23), are comparatively high priorities, while compliance management (35) and biodiversity (72) are further down the table.
The data shows that European tech firms are already shifting their strategies. As a result, they could be in a better position to manage future regulatory changes with ESG topics already included in financial disclosures.
U.S. tech firms have a bigger gap to close. Their lower emphasis on material ESG risks could mean future developments will be more difficult to respond to — a clear red flag to stakeholders and putting the companies at greater risk of greenwashing accusations.
The tech sector is not alone in facing this challenge. Many companies are asking themselves how to approach ESG now that tighter regulation is imminent and greenwashing has become top of mind for investors, regulators and consumers.
Responsibility now rests squarely with the C-suite to lead with a strategy.
Step 1: Set a strategy
The first step is to fully understand the ESG risks you face. Companies can do this by assessing the ESG issues that impact their business, taking into consideration regulation, reputation, industry trends and how to stay relevant. There is no shortcut to this; companies must do their homework.
This research will involve speaking with stakeholders to understand what is most important to them and understanding the wider ESG environment by mapping the issues and topics that could impact the business. Together, these insights can inform data-driven decisions on which issues you should focus on.
Standards setters and regulators are doubling down on ESG, transforming it from a matter of compliance to one of strategy. This is a seemingly small shift, but it revolutionizes the way companies will develop their business strategy. ESG can no longer be outsourced to a siloed team — the C-suite must have the skills, and they must champion the cause.
Taking a strategic approach to ESG is a new and often uncomfortable process for leaders. Who is responsible? Do the skills and knowledge required exist within the business? Should the CEO or CFO spearhead this?
The truth is that this is a process that requires shared responsibility, and the C-suite must decide how to involve their own ESG or sustainability teams.
Step 2: Operationalize the strategy
Once the most relevant topics become clear, companies must set realistic and relevant goals. Once achieved, these goals will bring credibility to the organization and give stakeholders confidence in your ability and intent.
While existing standards offer some help, companies must decide which parts of the alphabet soup of ESG frameworks are most appropriate for them. A few good starting points are: The Global Reporting Initiative (GRI), the Sustainability Accounting Standards Board (SASB) and the Task Force on Climate-Related Financial Disclosures (TCFD).
At this stage, it’s less important to follow a specific framework rigorously. Instead companies should look to use the metrics and indicators to help measure their own strategic areas of focus.
Standards alone will not make a business sustainable, but a strategy, an opinion and complying with the law is where it starts. The standards exist to help track progress, so getting it wrong at this early stage can be a problem.
Step 3: Communicate your actions and progress
The most important step in the ESG process is to communicate the actions you’ve taken across the business. Stakeholders, from the board to customers, are interested in progress, while regulators are focused on compliance and authenticity.
It’s important to ensure your financial and sustainability reports are consistent and reflect what you’ve done to meet your ESG goals. As regulators scrutinize these reports ever closer than before, inconsistencies could put you at risk of a greenwashing investigation.
Communicating and reporting in a balanced and transparent way ensures all stakeholders understand the company’s values and that their appetite for risk is reflected in the business strategy. It is important to make sure to take what you’ve learned from this process, as well as the response of stakeholders, and feed it back into strategy development to reflect changing priorities and perceptions.
This isn’t woke capitalism; it’s smart business.
Safeguarding against greenwashing
The sudden interest investors have taken in ESG has led to institutions overseeing financial reporting focusing more on ESG strategies and their delivery around the world.
Greenwashing investigations in the financial sector, from Deutsche Bank’s DWS to BNY Mellon, came about because the companies claimed they would deliver on their promises but didn’t. This is not about getting a magic formula wrong; they simply didn’t live up to their public commitments.
Tech companies stand to put themselves at risk if they continue to demonstrate disconnected ESG and business strategies. Agencies and regulators, which have been largely focused on financial services companies so far, could easily shift focus to the tech sector. Without adequate preparation before making climate-related disclosures, tech companies could face serious consequences. If you say something, you must deliver it and prove it.
The financial sector is the pioneer in ESG, unearthing some of the better (and worse) practices along the way. If there is one takeaway from their experience, it is that ESG skills and expertise are still catching up. To learn from this, tech needs to invest heavily in the skills and knowledge to create a good ESG strategy.
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