Even though we have been talking about climate change for decades, and ESG (environmental, social, and governance) has been around for about 20 years now, the tipping point was 2020. We began to see a greater focus on extreme weather events, social justice issues—particularly in the United States—and COVID-19. All of this has accelerated the broader understanding of ESG, but it seems there is still sometimes confusion.
I recently sat down with Matt Sekol, sustainability industry advocate, Microsoft, to discuss this very topic. He explains that ESG often gets conflated with a lot of things including sustainability, climate change, and DE&I (diversity, equity, and inclusion), but it is not always an improper conflation.
“ESG refers to the material risks and opportunities around environmental, social, and corporate governance, often in the pursuit of this long-term resilience and growth,” he explains.
He gives a few examples that demonstrate the subtlety between ESG and these other topics. A quality DE&I program may address a very pressing social justice issue for stakeholders, but it might also have material benefits to the company in things like talent attraction and retention. A second example is a beverage company might look to responsibly manage a water shed because that is material to their business. They can’t produce carbonated beverages or juices without water.
“ESG is really hard because of this nuisance between value and values and getting it right means looking at these issues through several lens, largely including data, as only the company can,” explains Sekol.
Overcoming Challenges
This greater understanding of ESG has catapulted it into the limelight, but there are still challenges. In the past three years, companies have had to make hard business pivots, all among new regulations such as the CSRD (Corporate Sustainability Reporting Directive) in the EU (European Union). The FCC (Federal Communications Commission) is also inching closer to its climate rule here in the United States.
“These regulations, while necessary to inform shareholders and stakeholders for better decisions, these regulations may actually be one of the biggest barriers to change because while we have to measure in order to manage, there is a lot of effort going into highly accurate and timely reporting from systems that weren’t built to do this. This is creating a lot of focus on that technology problem instead of maybe a technology opportunity to solve some sort of impact,” he says.
Sekol points to numbers from the Wall Street Journal that demonstrate the regulatory burden just for the FCC proposed rule, which is believed to be somewhere in the range of $750,000 in the first year.
Looking beyond the regulatory burden, there is also simply the question of how companies are going to fund this massive transition. McKinsey & Company suggests $9.2 trillion will be needed annually in order to achieve net zero.
“We need disclosures in order to understand the progress,” he says. “They are huge challenges though, but we also need to be focusing on the progress in parallel and not just the things that come through disclosures.”
Data, Data, Data
At the center of this movement will be data, which is something I have discussed with Sekol multiple times. Data will be used to have accountability to regulators. It will help inform things like operational reductions in carbon or water management. Data will inform how we are going to innovate around capturing these material ESG opportunities. Sekol suggests we need to break down data silos responsibly with principles still in mind and we need to bring data together with the cloud.
Sekol points to manufacturing as a good example of an industry that could stand to benefit from ESG, as there is an EIA study that suggests 54% of the world’s energy consumption happens in manufacturing. On The Peggy Smedley Show, he details how automotive companies can leverage data integration across sustainability principles in core processes, while concrete manufacturing can leverage sensors.
“ESG gives digital transformation something it never had: budget and a purpose,” he explains on the episode of the podcast.
He also strongly encourages companies to consider how they leverage roles like chief sustainability officer or an ESG or DE&I officer, as these roles are expected to do different things. Leverage them for the knowledge they have but try to do ESG across your business. Make sure you empower those people to execute, which is governance.
Don’t Forget Governance
Too often the G is overlooked when it comes to ESG, as governance is a hard idea for people to wrap their heads around. Sekol points to the example of data governance or process governance or responsible AI—something many following my podcast and this column can often relate to.
“All of these things are governance principles that manage some sort of technology risk,” he explains. “Governance for ESG is similar. It is corporate governance. It is how the businesses run in a responsible way through its principles. Or a responsible and consistent way.”
It’s not surprising then that some people believe governance should really be first in the acronym because you can’t do anything without it. But Sekol likes it last because it is the last gatekeeper before executing any decision. “Governance impacts all sorts of different things like culture, employee behavior, and ethics,” Sekol explains.
At the end of the day, data will drive the ESG initiatives further than it has ever gone before, delivering transparency to stakeholders, and offering opportunities to innovate in businesses. It is these opportunities that I like to think about. The opportunities to save time, money, and to leave our world a little bit of a better place.
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