Technology’s Role in the ESG Evolution

Digital technologies enable decision-making processes that consider ESG factors, benefitting companies, shareholders, and the planet alike, writes Albert Plugge.

Listen to this Article

Ambitious ESG goals are now part of nearly every company’s agenda, from protecting biodiversity and reducing climate impact to reaching workforce gender parity and ensuring transparent financial reporting.

These efforts are paying off, according to a McKinsey report. Companies that improve ESG performance alongside profit and growth see greater shareholder returns over companies that only excel on financial metrics. It is thus essential for companies to develop an easy and effective way to measure progress, to not only align with global sustainability trends but to also ensure overall success.

European and UK directives like the Corporate Sustainability Reporting Directive (CSRD) and the UK Sustainability Disclosure Standards (SDS) underscore the increasing demand from financial analysts for more comprehensive ESG data to assess reporting more accurately. The CSRD dictates that companies must conduct a Double Materiality Assessment, analyzing their operations from two critical ESG perspectives. The first examines the company’s impact on people and the environment while the second assesses the risks and opportunities that ESG factors pose to the business itself, such as reputational damage and incidents of corruption.

A recent example of the importance of accuracy in the assessments of the financial impact of environmental risks is the latest wave of turbulent weather in the United Kingdom – specifically a trio of storms that hit in October and November of 2023 that caused insured losses estimated at more than £560 million. As part of their Double Materiality Assessment, insurance companies have to report on the financial impact these storms may have on their business. Moreover, to deal with more frequent and severe storms, they may decide to increase their premiums to citizens, businesses houses, and buildings. The situation illustrates the financial consequences that such events can have on businesses and thus the need for accurate ESG reporting and assessment.

To meet ESG targets, companies must often undergo a transformation.

The challenges surrounding ESG are sometimes referred to as ‘wicked problems’ – issues that seem impossible to solve. However, this is not necessarily the case, it’s just that changes are necessary. To meet ESG targets, companies must often undergo a transformation. By using digital technologies, companies can – together with their business partners – develop solutions that help them overcome ESG challenges.

There are two main ways companies can utilize technology to meet their sustainability goals. The first requires senior management to improve their ability to actually handle ESG challenges – this means increasing their regulation expertise so as to accurately assess the impact that environmental, social, and governance challenges have on the organization. Consequently, companies must also expand their digital capabilities. For instance, adapting EU directives into actionable taxonomies for seamless data exchange with business partners involves intricate processes that demand ongoing digital innovation and vigilance.

The second requires increased collaboration. Because ESG knowledge varies across internal departments and partners, companies must demonstrate the importance of synergy between these different areas. It’s also important to note that digital-enabled ESG solutions such as digital platforms are not yet mainstream and thus the design and management of these systems within an organization often requires an explorative approach. This means working together in an agile manner and, in this way, originally fragmented digital technologies will become more integrated, which in turn will support the exchange of ESG data between companies and their business partners.

Manually collecting ESG data is both time-consuming and labor-intensive, and often fails to give an accurate reflection of a company’s ESG performance. Typically, companies rely on methods like employee surveys and internal audits to gather this data. However, not only does this approach require extensive analysis and review, it also results in data that is fragmented across multiple internal and external stakeholders.

Given these challenges, it might seem that a comprehensive transformation of existing structures and workflows is needed. However, this can be risky, as it demands a complete overhaul by senior management and employees of their current operational methods. Instead, a more effective solution might be in the adoption of digital technologies as a way to streamline the collection and analysis of ESG data, and enhance the accuracy of its reporting.

Digital solutions are usually either managed in-house by a company’s IT department or outsourced to the market, so a good option is for companies to collaborate with the market since IT providers can provide solutions to support ESG reporting goals like carbon dioxide and travel emissions, energy, and waste consumption. These providers offer various features, like metrics, calculations, data management, and reporting, and include IBM, SAP, Oracle, Workiva, and specialist suppliers such as Carbon Cloud and Supplyshift, to name a few.

Data collection and analysis are just a couple of the many ways technology can help a company’s ESG strategy. Another way is through biodiversity predictions. Biodiversity, the variety of all living things on our planet, has been declining rapidly in recent years. A UN report, published by scientists in 2019, warned that one million species are threatened with extinction within decades. This is largely to blame on human activities, such as pollution and climate change.

To help restore Europe’s biodiversity, Members of the European Parliament backed a new law, in February 2024, that requires all EU countries to work towards restoring natural habitats. Member states must restore at least 30% of habitats covered by the new law (from forests, grasslands, and wetlands to rivers, lakes, and coral beds) from poor to good condition by 2030, increasing to 60% by 2040, and 90% by 2050.

Digital technologies can provide insights for governmental bodies on future environmental risks arising from biodiversity measures, such as ensuring water sent to dry lands to improve their biodiversity doesn’t damage people’s homes. These predictions and scenarios can provide relevant insights into restoring biodiversity.

Another example is the storage of greenhouse gases: one of the biggest challenges today is how to capture greenhouse gases (GHS) like carbon dioxide, methane, ozone, and nitrous oxide, and develop solutions to store these GHS. Digital technologies like IoT sensors may play a useful role in measuring underground GHS emissions storage. Digital technologies could even enable experts to determine the most optimal temperature for storing emissions and tracking their subsidence impact. Subsidence is the sinkage of ground under buildings, causing them to collapse.

To effectively report on ESG targets, companies must be able to collect data not only from internal departments (e.g. finance and accounting, HR, IT, etc) but also from their business partners (energy suppliers, contractors, and accountants.) This means there must be high collaboration across the entire supply chain in order for a company to finally report on an ESG challenge.

For instance, consider the significant environmental of deforestation, which is a major environmental challenge. Companies are required to disclose the degree to which their supply chain partners are implementing strategies and initiatives to reduce deforestation and to monitor the effectiveness of these efforts. This approach underscores the importance of transparency and accountability in managing – and mitigating – environmental impacts within a company’s operations.

And finally, another example in which technology can contribute to achieving ESG goals is the role of automated controls. Digital technologies like machine learning are able to take in and process related information, compare data sources, and then make decisions. Examples can be found in the construction and building industry where machine learning applications help determine which buildings require additional maintenance. This results both in an increased level of effectiveness and fewer transportation activities, which in turn decreases energy consumption and greenhouse gases.

Ultimately, digital technologies equip businesses with the capability to implement sophisticated automated controls, thereby facilitating decision-making processes that are considerate of environmental, social, and governance factors, underlining the transformative power of digital innovation in fulfilling ESG commitments.


© IE Insights.