ESG in the Tech Industry: What’s Coming Next

Mar 23, 2023 12:00 PM ET
Technology Executive

Global climate change is a driving force behind the growing urgency across all industries to embrace more substantial environmental, social, and governance initiatives. This year will see several new ESG-focused environmental and financial reporting regulations take effect in major markets around the world.

As an innovation leader, the tech industry is set to take a more prominent role in ESG spaces. Let’s take a look at what’s happening now and what’s coming next for ESG in the tech industry.

ESG: A Quick Overview

ESG is a framework for evaluating the health and sustainability of an organization based on environmental, social, and governance factors.

Environmental: Impacts on the natural world, such as carbon footprint, sustainability initiatives, and adherence to applicable environmental regulations.

Social: Impacts on people, such as diversity and inclusion programs, corporate/community relationships, adherence to labor laws, and humanitarian labor practices.

Governance: How an organization is run, such as the composition of the board, executive compensation, and whistleblower protections.

ESG and the Tech Industry

The tech industry has already been making an impact in ESG spaces. Tech giants Apple and Salesforce were among those requesting more stringent regulations around ESG reporting.

While on the surface an industry requesting more regulation may seem counter-intuitive, the tech sector does stand to benefit from driving ESG forward, in terms of appeal to both investors and consumers.

The future of investment is ESG

ESG-rated investment funds have performed well in spite of recent market concerns, and organizations that have already done the hard work of achieving an ESG rating are ready to compete in the new ESG-focused capital market.

This competition will pick up soon. The SEC’s climate disclosure regulation is slated to come online in 2023 and includes disclosure of Scope 3 emissions, which are emissions that originate from upstream and downstream activities in the value chain.

What does this mean for the tech industry? To remain competitive, tech companies that offer digital solutions will need to have a strong ESG rating so they don’t impact the Scope 3 emissions of the companies that use their software or service.

Improving infrastructure & efficiency in data

Scrutiny of the tech sector’s environmental and social impact has made headlines recently, with reports of excess water and energy use to sustain data centers.

In response to skyrocketing demand for data center facilities and the subsequent expansion of their carbon footprint, tech industry leaders are working on creating solutions that will enable data expansion in more efficient ways.

These initiatives include:

  • The European Climate Neutral Data Centre Pact, which pledges to make data centers climate-neutral by 2030.
  • The Open Compute Project, which is working to redesign hardware technology to increase computing efficiency.
  • The 24/7 Carbon-free Energy Compact, a project of the United Nations and Sustainable Energy for All, signed by Google, Microsoft, and Iron Mountain.
  • DIMPACT, a project by Carnstone and the University of Bristol that measures and reports the carbon footprint of digital services.

Governments are also investing in improved infrastructure, with the US Department of Energy announcing $42 million to aid in the development of more energy-efficient cooling systems

Diversity in the Tech Industry

While the environmental component in ESG typically receives outsized attention, the social factors are just as important for the well-being of global citizens.

The tech sector has made strides in recent years to address diversity disparities, but with the recent volume of layoffs by major tech companies, those gains are at risk of being erased.

Reporting by Reuters revealed that job losses between September and December of 2022 impacted women and Latinos at a higher rate, with tech employees belonging to these minority groups making up 46.64% and 11.49% of the tech layoffs respectively.

Even prior to the layoffs, a study by S&P Global found that one in three women in tech reported being sexually harassed in the workplace, signaling a need for improvement in workplace culture within the tech sector.

Moving forward, tech leaders will need to evaluate the alignment of their diversity policies and hiring practices in light of their ESG targets.

How Tech Innovation Can Drive ESG for All

One of the greatest opportunities for the tech industry at this moment lies in creating the next generation of technology that can curb climate change and improve systems used to combat existing consequences.

Alongside improved green energy storage and technology used to combat forest fires with AI and machine learning-powered drones, there are opportunities for tech to help other industries reach their ESG goals.

The analysis, reporting, and storage of ESG-related data present a problem for many industries – one that tech can resolve. A recent McKinsey report on the impact of ESG in banking cited an opportunity for tech to make a significant difference. “Banks must adapt their IT systems to systematically collect, aggregate, and report on a broad range of ESG data.”

As Microsoft President Brad Smith recently noted, “Cloud-based digital services, the better use of data, and rapid advances in AI will create new opportunities for us to help every organization achieve more progress in addressing the world’s climate and energy needs.”

To learn more about the impacts of ESG in the tech industry and how your business can prepare, connect with our team of experts today.