Environmental, social and governance (ESG) measures have become undeniably mainstream when assessing business performance. Aside from the moral imperative, the business case is clearer each year: this is about being fit for the future. Companies are facing unprecedented stakeholder interest with 90 percent of the world’s GDP now covered by net zero commitments; a tsunami of ESG-related regulation; soaring global energy prices; a talent war for human capital, and increased consumer accountability.
Like digital transformation, this dynamic will create winners and losers. Across industries, winners will have something in common: effective use of technology to drive, measure and account for their ESG impact. Rather than a separate, organizational-wide challenge, ESG should be built into a digital strategy. Digital transformation is already having a significant impact on ESG in two important areas – data and disclosure, and resource efficiency.
Climate risk is investment risk.
Unprecedented demand for ESG disclosure
In recent years, ESG has shot up the agenda. A key driver is increasing awareness of the link to financial materiality. The release of the ‘Taskforce for Climate-related Financial Disclosures’ guidelines in 2017 by the Financial Stability Board sent a clear signal to the market: climate risk is investment risk. Evidence continues to show that organizations which consider ESG are more attractive companies to work for, with, and invest in. According to S&P Global Market Intelligence, during the pandemic, ESG-focused funds and companies outperformed peers, with factors such as better supplier management and employee engagement paying off.
New opportunities are emerging, especially around the energy transition. The largest reallocation of capital in history is needed to meet net zero, with an annual increase of $3.5tn towards low-emission assets, according to McKinsey. Meanwhile, in Deloitte’s view, ESG-mandated assets will represent half of all assets under management by 2024 at the current growth rate. The interest is matched by consumers, with sustainability as a driver of consumer action and a powerful brand differentiator.
The rapid growth of ESG investing and sustainability claims from companies has spawned a wave of ESG regulation, as legislators look to set common standards and reduce greenwashing. Much is focused on helping investors and financial market participants understand what is ‘green’ and what is not. This means driving consistency and comparability through mandatory reporting and audit, in a landscape that has been dominated by an ‘alphabet soup’ of overlapping voluntary standards. The incoming ‘European Sustainability Reporting Standards’ for example will introduce over 1,000 ESG data points to report and audit. The Securities and Exchange Commission (SEC) climate disclosure rule, a requirement from the SEC for companies to report climate risks to their operations when they file documents such as annual reports, aims to move climate reporting to the level of financial reporting.
Time is not on our side. The pace of change reflects the urgency of action on topics such as climate change, with standard practices developing in real time as companies grapple with the demand for ESG disclosure.
The landscape has been dominated by an ‘alphabet soup’ of overlapping voluntary standards.
From burden to opportunity
The good news is that ESG data is already starting to leverage digitalization. By nature, ESG sits across the entire business, and needs to bring together disparate data managed by different functions. The growing focus on value chain inclusion also means connecting to external sources, such as supplier sustainability data. Once organizations understand what data they need and where this sits, they can:
- Connect and automate data collation and analysis, from existing sources like human capital management, centralizing disparate datasets
- Map against common ESG standards, frameworks and regulations
- Manage and analyze datasets to drive strategic decision-making
One example of how this data can be used to drive a business’ ESG strategy is carbon footprint measurement. IFS hears from customers that emissions reporting is a top ESG priority. Tracking this not only meets reporting obligations, but also helps to prioritize energy reduction strategies and save associated costs. That’s why our first step towards helping customers with ESG disclosures is through emissions calculation.
To do this, we are developing the IFS Cloud Emissions Tracker. It initially allows for Scope 1 and Scope 2 emissions calculations of a company’s carbon footprint, to help customers manage their climate impact. The primary differentiator is that our tool focuses on customer data already in our cloud platform, making the data collection process simpler. Against a backdrop of complex ESG regulations, frameworks and standards, this simplification will be key to effectively managing disclosure.
Lifecycle approach: efficient, effective use of resources is a ‘win win’
Another intersection of ESG and technology is around efficient use of resources. There’s an imperative to get smarter about how we use finite resources and raw materials, with both increasing demand and decreasing availability and reliability of supply. The world’s energy needs are set to double by 2050. Carbon pricing is surging, with carbon trading seen as a one-way bet. Investors have begun trading in water futures, where demand already outstrips supply. Each year in Europe, €78bn of materials value is lost in the use of steel, plastics and aluminum. Increased competition and pricing of resources will drive out wasteful business models in favor of circular practices.
Digital capabilities are crucial to this. Take Volvo Group Operations and Solutions, whose remanufacturing process, enabled by IFS, focuses on a circular economy through servicing, maintaining and repairing to increase the utilization rate of all materials. Servitization offers the potential to decouple growth from resource use. Changing the business model to one of service means long-term contracts, where the company is responsible for design, maintenance, outcome and efficiency for a decade or more. This changes the mindset from “take, make, waste” to one of sustainability, and incentivizes products which can be repaired and reused. This has an impact on the design, with service models enabling more expensive, longer-lasting designs. Ensuring such designs are commercially viable can also help to scale up adoption of innovative, sustainable technologies.
Rolls-Royce, IFS Change for Good winner from 2021, is a leader in servitization. In the 1990s, it made the revolutionary move from a manufacturer of equipment to a provider of long-term services, through a dollar-per-flying hour model. We play a vital role in realizing Rolls-Royce’s ‘Intelligent Engine’ vision, enabling the ‘blue data thread’ of data connectivity between airlines and Rolls-Royce. This allows the business to improve the time between engine overhauls by 45 percent and avoid the carbon associated with this process, having both a bottom line and ESG impact.
Impactful change must be led from the top with close alignment to business priorities.
ESG leaders embrace digital to drive positive change
Technology is already transforming the sustainability landscape, especially for data, disclosure and resource management. Companies can leverage this by considering ESG as part of their digital transformation strategy. Effective use of technology is the only way to keep up with the pace of change, especially for data management and disclosures, where simplification and automation will be key.
The frontrunners will take it a step further to identify how their business model can evolve to be more sustainable through use of technology such as servitization and remanufacturing. Ultimately, like all transformation, impactful change must be led from the top with close alignment to business priorities.
Sophie Graham is global sustainability (ESG) director, IFS.
