Why growing tech companies need to consider ESG now more than ever

The five largest tech companies have posted trillions of dollars in revenue and multi-billion dollar profits over the last year. Despite this financial performance, technology companies aren't immune from business risks. The pandemic has in particular renewed the public’s focus on environmental, social and governance (ESG) issues. And in order to see continued growth, tech companies must update their strategies accordingly. Tech companies in particular — especially startups and other companies with an eye toward growth — stand to benefit from a stronger focus on ESG. Companies with a higher awareness of ESG risks and a proactive strategy to mitigate them will be far better prepared for the regulations and reporting requirements that are sure to come.

The increasing importance of ESG in tech

For the better part of a decade, ESG has been part of the conversation among business leaders, regulators and consumers. In the last few years, ESG has become more mainstream as regulators continue to discuss the importance of reporting and disclosure standards in this space. 

There is, however, a common perception that ESG is socially conscious but not necessarily valuable – let alone crucial – for businesses. But looking at the corporate landscape over the next few years should disabuse any tech company of this notion. Businesses face increased risks related to environmental, social and governance factors — from pollution to worker safety issues and reputational damage from diversity or corruption concerns. Whether an established multi-billion dollar brand or a startup set to go public, tech companies need to be aware of and prepared for these risks.

Recent research indicates that while many tech CEOs are aware of the importance of ESG, their companies aren't fully prepared to measure and track related metrics or develop actionable plans to mitigate ESG risks. Although CEOs say climate change and environmental issues are the top risks to their growth, 86 percent of those support increased sustainability regulation of the tech industry. Though 34 percent of tech CEOs say climate change is having a significant effect on their company's funding, only 26 percent have substantially incorporated ESG into their strategic planning. The research also suggests there is a dearth of in-house ESG expertise in tech companies.

Beyond minimising risk, a stronger focus on ESG can drive better financial performance and make companies more resilient. In 2020, several ESG-focused indexes outperformed other indexes, and sustainable funds outperformed traditional funds by 4.3 percentage points. Previous research also shows companies that focus on ESG typically have higher equity returns than those that don't and have less downside risk in the form of lower loan and credit default swaps and higher credit ratings.

Tech companies often drive local and global economies, so embedding ESG practices into the industry — and transparently tracking progress towards goals — could have a significant impact and catalyse other industries to follow suit.

How tech companies can develop their ESG strategy

While ESG standards have not been settled, tech companies can advance ESG within their own companies through three steps.

Adopt an ESG approach

Tech companies looking to create an ESG strategy must first set expectations and commit to transparency. That begins by developing ESG goals, expressing them publicly, and establishing mechanisms to measure and track ESG metrics. The World Economic Forum's proposal, “Toward Common Metrics and Consistent Reporting of Sustainable Value Creation,” The Sustainability Accounting Standards Board’s (SASB) list of 77 industry standards and the framework from the Task Force on Climate-Related Financial Disclosures (TCFD) are all valuable resources tech companies can use to begin formulating their internal ESG goals and policies.

Find areas of impact

When it comes to making progress on ESG criteria, tech companies should think about areas where changes can make a big impact. For example, as part of its strategic planning, a company might consider launching an initiative to make its computing workloads more efficient to reduce power consumption and greenhouse gas emissions. Moving to the cloud, for example, or adopting a serverless architecture can reduce energy requirements. 

ESG strategies — such as focusing on responsible supply chain management, creating corporate wellness programmes and ensuring better corporate governance — not only benefit the company but can help minimise risk. By instituting responsible sourcing practices with their direct suppliers and sub-vendors, tech companies can identify potential compliance challenges in their supply chains early on. They can also prepare for potential ESG-related risks, like political instability or natural disasters, that may disrupt their supply chain and potentially compromise their financial performance. 

Evaluate and report

Though ESG reporting for companies still remains largely voluntary, it’s likely that standards and requirements will be implemented in the coming years. Companies that begin to develop a measurement and reporting structure now will be well-positioned to navigate regulations in the future. Robust ESG reporting can also benefit the company by appealing to investors. Research shows that in 2020, 85 percent of investors considered ESG as part of their investment strategy.

Though ESG approaches will vary based on the company, its operations, financial resources and overall strategic goals, it’s clear that tech companies who are sitting on the sidelines can no longer remain there. Tech companies that prioritise ESG will be better equipped to manage risk, investor and shareholder expectations, and future reporting obligations.