Tech’s ESG fails are the new oil spill. Stay clean

Oil spills used to dominate news reports — and stain corporate reputations. Today, a different type of scandal has surfaced, and tech companies are often at the center.

Consumers, employees and investors are now watching a broader range of environmental, social and governance (ESG) concerns. They’re paying special attention to tech companies that are pervading business, society and government.

We trust tech companies to do the right thing — or even lead the way, demonstrating ethics that will protect our data and interactions in the technology that fills our lives. “I think there’s an underlying assumption that tech companies are always ESG friendly because they have appeared in this digital generation time zone,” said Mark Lemon, Grant Thornton senior manager of ESG and Sustainability Services. “Marketing to millennials, speaking to their sense of connectivity and purpose — usually this sentiment is baked into the value proposition of tech companies.”

That’s why it’s shocking when we hear that a tech company has violated our trust. Even if the violation doesn’t break a law, it can break the trust that’s central to the company’s business. “The danger that’s appearing is this: When the messaging for tech companies is off, they enter the murky waters of being called out for things that they’re saying, but not doing,” Lemon said.

“Think about some of the recent headlines — some of the failings — it used to be an oil and gas company that would spill and get the negative attention. Now, it’s tech. There is more focus on how a CEO handled a situation and what products might do to future generations, especially from a modern tech brand,” he said.

Steven Perkins, Grant Thornton national leader of Technology and Telecommunications, said, “Today, tech companies dominate markets. They are the oil and chemical companies that rose to the top of the Fortune rankings years ago. Because of that, they appropriately draw a tremendous amount of attention.”

Beyond the reputational damage a data breach can levy, ESG failures can spill out to poison a company’s recruitment and funding discussions. CFOs and other top leaders in tech have been asked to respond to ESG questions from investors, audit committees, clients and employees. ESG can include a range of topics, but tech leaders need to prioritize five issues in particular:

ESG frameworks and disclosures
A plan to unpack ESG risks and opportunities
Consistent internal and external marketing and communication
Global and regulatory understanding
Authentic understanding of how ESG integrates into a business

To understand the required risk mitigation, business model adaptation and other responses for ESG, tech leaders should examine the emerging questions within each of these top five issues.

1. ESG frameworks and disclosures

Tech companies can form strategies and risk mitigation to prepare for the full range of ESG priorities while also enhancing the resilience of their business operations.

“The expectations for tech companies to lead and deliver on ESG are very, very high — including expectations from the general public,” Perkins said. “The companies may fall short, but the question is this: How can they continue to improve their performance, and how can they accurately measure and demonstrate progress?”

To help mitigate risks, take tactical actions and demonstrate progress and value over time, consider the ESG implications for your core strategies and operations.

How does your risk and crisis management enhance your business resilience and adaptability?

You should be ready to show how:

You have adapted to face global crises such as the COVID-19 pandemic, economic recession and supply chain shortages or delays
You track the supply chain delay impacts on different regions and markets
You track the effects of extreme weather on supply chains, with a climate risk assessment for key locations

How are you operationalizing ESG?

You should be ready to show how:

You are engaged in business transformation via integration and alignment among corporate strategy, product service strategy, customer strategy and ESG strategy
You understand the different effects on global net zero commitments across business operations

How is your technological innovation applied to ESG applications?

You should be ready to show how:

You consider how to apply machine learning, AI, deep learning, Earth observation and other new technologies for ESG tasks such as risk assessment, tracking and reporting
You apply innovations in data center sustainability and verify equal application of green cloud capabilities across global technology centers

2. A plan to unpack ESG risks and opportunities

Tech companies need to be ready for nongovernmental groups, investors and business partners that raise ESG concerns or demand more disclosure and transparency.

To anticipate these concerns and position your organization as a leader, consider some questions about the ESG-related structures and metrics in your organization.

Do you have a taxonomy concerning social elements and green revenue?

You should be ready to show how:

You understand the implications for your data, reporting and compliance around social elements
You are in compliance with international minimum safeguards

How are you addressing materiality concerns that impact or will impact ESG ratings?

You should be ready to show how:

For ethics and compliance, you are conducting independent audits of global ethics practices
For employee rights, you are fostering a fair and inclusive workplace by investing in human capital and conducting human capital assessment to determine investment in employee development and training
For human rights, you are conducting a human rights assessment for disclosure and demonstrating compliance with local legislation
For security, privacy and data protection, you are assessing and mitigating risks
For your community, you are taking positive action in the community and for the community

3. Consistent internal and external marketing and communication

In the turbulent tech market, it’s important to actively understand how competitors are responding to and preparing for new questions about ESG. Those questions can come from individual clients or the talented people you want to recruit.

“Some tech companies continue to go into the market saying, ‘We’re amazing, we’re a great place to work, look at these diverse folks on our poster,’” Lemon said. “And then, when people join them or stories come out, the companies get a massive blowback if they’re not actually doing what they’re saying.”

That’s why it’s important to be honest and practical about ESG goals. “I’ve always said that ESG is basically good strategy,” Lemon said. “If you peel back any ESG key performance indicator — like diversity, equity and inclusion — it’s a way to measure the diversity of your workforce. That is essentially human capital transformation, which is your culture strategy, something a strategic CHRO should always be thinking about already.”

To help ensure that your marketing aligns with your culture, and your culture is a competitive asset, consider how you measure yourself against competitors in the market.

How are you assessing and tracking ESG concerns from customers and suppliers?

You should be ready to show how:

You maintain an understanding of the ESG maturity, needs and concerns of target market companies that are customers and suppliers (possibly employing European Single Electronic Format tagging or other ESG tools)
You are tracking the target market maturity unique to your geography, and how you can become an ESG leader to help mid-market non-EU companies mature

How are you maintaining a competitor analysis of emerging ESG software market?

You should be ready to show how:

You maintain an industry evaluation to determine key competitors that are offering similar functionality as your emerging ESG products
You understand recent market developments where start-ups emerge and existing companies merge, add functionality and acquire smaller companies to meet increasing ESG data and reporting demand in the software market

How are you benchmarking ESG commitments and initiatives against leading peers?

You should be ready to show how:

You maintain an evaluation of ESG compared with peers across all of your products or services
You evaluate how your organization can position itself as a market leader on ESG, and you take action toward that goal

4. Global and regulatory understanding

Tech companies have been pushed to monitor rising tech supply chain risks, and ESG poses another factor. Requirements for supply chain transparency can mean that companies need to maintain a proactive awareness about labor practices, human rights, water scarcity and other issues around the world.

“This industry is inherently global, and many tech companies are international from day one — especially software companies that can sell through the internet and deliver through a URL.”

Steven Perkins

National Leader, Technology and Telecommunications Industry

“This industry is inherently global, and many tech companies are international from day one — especially software companies that can sell through the internet and deliver through a URL,” Perkins said. “So, the regulatory complexity is not uniquely acute, but it’s particularly acute, because they have to navigate regions, jurisdictions, countries and a variety of other factors.”

Consider the following questions about business partners, customers and their locations, up and down your supply chain.

What are your expectations of supply chain participants?

You should be ready to show how:

You have ESG expectations for your supply chain, and your capacity building implements ESG throughout the supply chain in all your geographies
You enforce and globalize supplier expectations and elements
You evaluate ethics, corruption and labor practices across your international supply chain locations
You complete supply chain due diligence and comply with legislation concerning supply chain regulation, transparency and human rights policies across international entities

How are you adapting ESG related to the increasing focus on clean water?

You should be ready to show how:

You understand your presence in water-scarce regions and participate in initiatives to address community water issues and usage
You have established reporting processes for water resources
You report on water as part of your taxonomy
You assess potential impact and environmental damage costs related to water usage in your external supply chain

5. Authentic understanding of how ESG integrates into a business

Technology companies need to be flexible — some, even aggressive — about expanding into new geographic markets. But new markets come with new regulatory requirements and risk exposures. Evolving ESG regulations in markets around the world mean that tech companies must be prepared to demonstrate diligence and provide data for a growing range of requirements.

Even in the U.S., companies should be aware of the current and emerging regulations regarding climate change around the world. The Commonwealth Climate and Law Initiative recently published Fiduciary Duties and Climate Change in the United States, highlighting that U.S. leaders face an expanding exposure if they do not act on the climate change component of ESG.

Some tech leaders also have a chance to participate in the development of U.S. regulations. “Many companies have the opportunity and the responsibility to engage with regulators, legislators and oversight bodies to evolve a set of standards and protections that improve today’s world and get ahead of emerging issues,” Perkins said. “For some of these standards, other countries are ahead of the U.S.”

“The EU is trying to put parameters around ESG, even for some things that don’t exist yet,” Lemon said. “I don’t know if there’ll ever be a moment where the regulatory environment catches up with how fast tech is moving, but you can align on how to govern some of the new elements that arise.” To help inform regulatory discussions, tech leaders can look to industry resources like the Information Technology Industry Council (ITI) recommendations to the recent United Nations Framework Convention on Climate Change.

To understand the potential points of exposure for your company in particular, consider questions about your geographical markets and reporting requirements.

Have you examined the regulations across key market areas?

You should be ready to show how:

You are identifying where demand for ESG software may develop with increased ESG regulation
If you are a supplier to many companies, you understand what your requirements will be in relevant markets, geographies or industries
You are mapping emerging ESG issues by importance across geographies

Have you sought expert guidance on evolving and future regulatory requirements in target geographies?

You should be ready to show how:

In the U.S., you are tracking the SEC forthcoming rule on climate disclosure
In Europe, you are tracking EU taxonomy changes (climate and social), along with the impacts of a Corporate Sustainability Reporting Directive; in Germany specifically, you are in compliance with the Supply Chain Due Diligence Act
In Latin America, UK, Ireland and the Middle East, you are maintaining an awareness of potential exposure and emerging legislation

How are you improving internal auditing and publishing of data in advance of regulation?

You should be ready to show how:

You are ensuring that processes, systems and controls around data are in place in advance of this information being requested by regulatory bodies
You are increasing the reliability and verifiability of ESG data for reporting and regulation requirements
Readiness assessment or assurance services are reviewing internal controls and processes around ESG data and reporting, with recommendations on how to improve and incorporate systems to improve data quality

A scalable approach

By taking a scalable and purpose-driven ESG approach, tech company leaders can address emerging questions while achieving real impact toward ESG and business goals. The sooner that companies act, the better their culture will scale with their growth.

“ESG is not something you bolt on after the fact, at a certain stage of growth or a certain ownership structure, or whether you’re public or private,” Perkins said. “It needs to be a core part of who you are in your processes. It is essential to your success as an institution, and it needs to scale just like your finance function needs to scale. Companies fail all the time because they can’t scale finance or another general operational capability. This is similar.”

“If fundamental ESG elements are not right when you start, then they will grow with you that way,” Lemon said. “The more limelight you get, the more danger you’re in. With greater scale comes greater responsibility.”

Lemon cited one company founder who grew his core staff by recruiting close former classmates. But now, as the company seeks more talent, candidates notice what’s missing. “When top-level talent walks through the building, they’re impressed by the organization, the returns and the stock price. But what they ask is ‘Why aren’t there any recycling bins, and why is there no diversity here?’ Those kinds of things, at scale, lead to things that can blow up.”

“I think the overarching takeaway is to fundamentally design a sustainable business from day one,” he said. “If you’re private, act like a large public company. The sooner you design ESG into your organization, the less exposed you are, especially if you scale at a rapid rate.”