Tech is driving ESG transformation on many levels. Yet, there’s more to be done.
In the past decade, the tech industry’s growth has been explosive. “Technology companies are today, and will continue to be, among the leaders of the US economy,” said Grant Thornton Technology and Telecommunications Industries National Leader Steven Perkins. Tech companies have used their economic strength and high market visibility to promote ESG values. “Tech continues to enable meaningful change and transformation when it comes to ESG integration in other industries,” said Grant Thornton ESG & Sustainability Services Director Suha Gillani.
“Tech continues to enable meaningful change and transformation when it comes to ESG integration in other industries.”
Tech firms can drive some of that change within their immediate ecosystem. “Tech leaders have set ambitious goals for their ESG programs, particularly in DE&I, employee wellness and emissions reduction. That inevitably causes a downstream impact, because they need their supply chain to help move the needle sustainably. So, that supply chain within the US is bringing innovative solutions to hasten the transition economy,” Gillani said, citing one company that provides a cloud-based service which each supplier can use to automatically track its carbon footprint. “The company provides a plug-and-play product, so that vendors can design data collection processes with greater ease and confidence, and give customers accurate information on their ESG progress.”
“In order to continue its leadership, the tech industry needs to make sure that it continues to embody the values of ESG with their products while encouraging ESG integration across the economy,” Gillani said. “It ultimately requires transparent, accountable governance at the top level, so that this transparency is trickled down the entire ecosystem.”
However, now that the industry’s economic growth has slowed — so, how can companies afford to do more?
“It's a new world for tech, the next phase for ESG, and tech has both a challenge and an opportunity.”
“Two years ago, we were in a hyper-growth phase for technology companies. Now, we have slowing growth,” Perkins said. “While this presents challenges, it creates the opportunity to lead. It's a new world for tech and for the next phase of ESG.”
To turn the current economic challenge into an opportunity, tech companies need robust governance that is designed to help them gain market share, secure talent, demonstrate progress and answer stakeholder expectations.
Governance with gains
At the top level, governance is a matter of integrity and compliance. “Good governance is the right thing to do,” Perkins said. “There’s also a recognition that, if you don't create an environment of accountability and transparency of your own volition, then regulatory authorities might force you to restructure or rearchitect. An easy example in ESG is the fact that regulators are now trying to get technology companies to build in longer lifecycles for raw materials and products, and the ability to recycle products as opposed to disposing of them.”
“Rather than have regulators dictate terms to the industry, the industry has an opportunity to lead from the outset and set their own narrative,” Perkins said.
When you proactively establish ESG goals and the infrastructure that will drive those goals, you can design a strategy that also drives sustained business value:
- Prioritize the ESG actions with the best returns: When you proactively form an ESG strategy, you can achieve ESG goals more effectively, with increased business value and with greater business resilience. If you wait to take a reactive approach, you might need to act quickly and without as much regard for business impacts or stakeholder sentiment.
- Incorporate ESG principles in your design process: Products that are more socially inclusive or environmentally beneficial can make ESG a part of your core business model while also gaining market share.
- Win talent with your culture: Young job seekers are prioritizing alignment of values as they look for future employers. When you intentionally foster and promote a culture that prioritizes ESG values, you can improve your recruitment and retention for the best young talent.
- Establish metrics that fit: Rather than scrambling to retrofit systems for metrics after people start asking questions, establish goals and corresponding KPIs that are meaningful to your organization and fit your organization’s size, phase and growth trajectory.
- Build your brand with integrity: People can see who’s leading, and who’s following. When you have been proactive about ESG, you are ready to answer stakeholder questions, connect your integrity to your growth and build your brand overall.
Let’s look at each of these actions in more detail.
Prioritize the actions with the best returns
When you set your own ESG priorities, you improve your strategic benefits and resilience.
“If you look at the new offices that tech leaders are building, there is a lot of consideration about solar panels,” Gillani said. “There are provisions in the US Inflation Reduction Act, as well as in some state programs, for installing solar panels and linking to the grid so they can make the state more resilient in terms of energy. That's a short-term investment for a long-term financial gain, because per-unit energy costs will go down for those companies.”
Gillani said that these measures can also build value and resilience in other ways. “Building ESG considerations within your enterprise risk management framework can strengthen the business’ physical assets. We might think about the recent flooding across the United States, and the resulting loss of assets asset under management.” Weather events like storms or severe temperatures can damage data centers and other physical assets, which adversely impacts the consistency and quality of the services that technology companies provide, if these physical assets are not bolstered to address these climate-related risks in the future.
“Failures like that have real costs for tech companies,” Gillani said. “Incorporating ESG considerations in the risk matrix and in the way that they build physical assets can reduce cost in the long run, because their production and services will be more resilient to adverse weather events,” Gillani said.
Incorporate ESG principles in your design process
When you make ESG values a part of your products, you make those values a part of your business model.
“Good governance not only includes running the business, but also making sure that the product design includes the principles of ESG,” Gillani said. That includes factors like environmental sustainability, inclusive design and user accessibility.
It can also include a consideration of cultural factors that might arise as your market expands. “Often, companies build a product for an initial target market, like a US healthcare or consumer market,” Perkins said. “Then, they rapidly expand geographies, and that exposes them to a series of different cultural, regulatory and social norms. Thinking about how you design a product, from the beginning, to operate in these different environments can help accelerate adoption and scalability.”
“It’s designing for cultural agility,” Gillani added. Design products to be accessible to and inclusive of marginalized communities, work across geographies and be resilient to climate change, including the way that a service is provided. This proactive mindset improves the long-term resilience and scalability of your products, in turn allowing for a larger market share.
Win talent with your culture
In today’s competitive market, a culture that prioritizes ESG values can help improve your recruitment and retention. Young workers are increasingly concerned about ESG values at their current or potential employers.
“Think of employee health, wellness and talent development,” Gillani said. Also consider how your public brand reputation will impact your ability to secure both new and existing talent. Recent events demonstrate that negative news can drive both users and recruits away from even the trendiest tech companies.
“A lot of technology companies are vulnerable to those impacts,” Gillani said. “It’s resulting in real revenue loss for some companies, particularly those that are B2C.”
In the recent Grant Thornton State of Work in America Survey, respondents ranked the factors that initially attracted them to their current employers, and the factors that are keeping them there. “Organizational reputation” was important across all industries, but especially in tech.
“The fight for the best engineering and senior leadership talent remains significant in the industry,” Perkins said. “A company’s ability to attract people is going to depend on their reputation.”
Establish metrics that fit
It’s important to share your ESG story. Take charge of your story by establishing goals and metrics that fit your organization’s size, phase and growth trajectory.
“Technology companies vary widely in structure,” Perkins said. “That affects how they should think about and implement governance. Probably most important is their stage of development: Are they a small emerging technology company, or a large and mature company?” The composition of leadership and governance can change over time, though the core issues stay the same. “Areas like diversity, sustainability and other elements of ESG need to be represented in governance regardless of the company’s size, and then you need to have people who are familiar with how to address those issues at your scale,” Perkins said.
Most companies are familiar with ESG goals that are tied to operational goals, like reducing energy consumption at data centers, or measures that are mandated by regulations. “But there are also measures that will drive product growth, investment growth, employee engagement and employee attraction in the increasingly competitive world for technology companies,” Perkins said.
“Whatever the appropriate measures are for a company, they need clear targets and regular transparent reporting,” Perkins said. “I think the industry has a leadership position and a voice, that gives it an opportunity to advocate for those measures and scale them across the supply chain.”
Build your brand with integrity
If you are proactive about measuring and sharing your ESG story, you can be ready to answer stakeholder questions and ultimately build your brand.
“A tech company’s ability to attract investment — whether that's shareholder investment for public companies or private equity and venture investment for private companies — is going to depend increasingly on its ability to demonstrate actions on ESG,” Perkins said.
In the current slow-growth environment, companies need to be intentional about where they start. “Every organization needs to look at their current operations, where they sit and where ESG fits in when creating value,” Gillani said. “Make sure there is a clear reporting line and a transparent body — such as an ESG committee — that brings together all of the initiatives, so that there is clarity in terms of the organization’s commitment, progress and accountability.”
To build on your brand’s integrity, start from within. “Make sure that a governance structure enables expertise development and upskilling within the organization,” Gillani said. “Governance should push all of that information from the top down, to help with the resiliency of the organization overall.”
Once technology companies integrate ESG within their business, they can be in a position to push it out to their wider ecosystem.
“I think there’s an important and increasing role that tech is going to play in defining community guidelines, such as in the virtual world and in the way that hybrid work is enabled,” Gillani said. “From a social perspective, the impact of technology products on health, wellness and the community is shaping community engagement in the future. That brings a significant financial opportunity along with an ethical responsibility.”
1:57 | Transcript
Governance with results
Once you identify the ESG goals and implementation structures that fit your company, you need to formalize the ESG strategy and results that you plan to share externally.
It’s increasingly important for regulators and stakeholders to see that a company has a cohesive ESG strategy which tracks progress across material topics. A unified ESG implementation roadmap provides transparency and accountability for progress on goals, and that resonates with shareholders. The more collaborative and forthcoming companies are about their ESG mission and vision, the lower their reputational risk.
You might need your strategy to include your supply chain partners, so help them understand their role in the strategy. “It could be that you need to help other companies track the data reported, through the byzantine matrix of uncertainty,” Perkins said. “It can be expensive to everyone. It helps tech companies when ESG standards and impacts are clearer, and their advocacy position can help them be a strong voice to make them that way. They can also make a difference with their ecosystem — the kind of companies that you partner with can send a message, and can be an influence.”
“In this volatile environment, the next ESG phase for many tech companies is to make sure that they're enabling their supply chain to achieve their ESG goals — through a clear policy, implementation plan and a robust reporting mechanism,” Gillani said.
Design an ESG policy and framework that meets stakeholder expectations while also being a best fit for your business, making sure to include some key elements:
- Define your organization’s ESG identity: collaborate with key stakeholders in your ecosystem through a materiality assessment to define your ESG priorities in a way that bolsters your brand and strengthens your business long term
- Industry awareness: Keep pace with industry shareholder expectations, without overextending resources by taking on new reporting and metrics that you cannot support. Use peer benchmarking and materiality insights to identify what is most material and strategic for your company and industry to track.
- Roadmap and action plan: Plan how you will operationalize your ESG policy and give shareholders a clear understanding of where ESG actions are leading and what they should achieve. Determine how to make ESG values a part of your products and daily business operations. This shows that integrating ESG in your operations is not just a good story for your company, but it is part of your corporate culture and long-term vision for value and success.
- Corporate alignment on reporting and frameworks: Ensure consistent reporting, every year, across your enterprise. This is what provides transparency for stakeholders to see progress. Consider globally recognized reporting frameworks and upcoming global regulations as guideposts for KPIs that you should be tracking.
- Robust governance structure: Clearly define roles, responsibilities and oversight mechanisms. This structure should not only guide your ESG initiative implementation, but also progress tracking and adaptation to ensure you can achieve goals and targets.
“This is an opportunity for tech companies to take advantage of the visibility and platform they have,” Perkins said. “If they do, it will pay benefits for society, and it's also going to pay benefits for them. The companies that are provably embodying ESG, both inside their companies and in their products and services, are going to be more attractive to the market,” Perkins said. “They're going to be more attractive to customers, and they're going to be more attractive to the best talent.”
“Make sure that the ESG framework is part of decision making throughout the organization – in product design, in the way you treat employees and customers,” Gillani said. “It is not just good business; it will result in making your business more robust against factors that could pose a reputational risk and result in revenue loss.”
“Tech leaders have the opportunity to lead the charge across industries,” Gillani said. “By working with regulators and other stakeholders, they can ensure that ESG requirements work in a way that doesn't stifle the economy but instead supports business resilience while helping corporations leave the environment and society better than how they found it.”
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