With Forbes calling environmental, social, and governance (ESG) factors the “biggest economic trend of 2021,” many technology companies are at an inflection point as they evaluate adopting a full suite of ESG strategies into their overall business plan. There is no one-size-fits-all approach for tech companies as executives evaluate the many factors related to ESG:
- Corporate, investments, and finance (incorporating ESG principles into fund formation, investments, and M&A transactions)
- Energy and climate change (investing in clean energy technologies and reducing emissions)
- Disclosure and enforcement (complying with evolving regulatory and disclosure rules)
- Retirement plans (considering ESG factors in investment decisions)
- Social issues (advancing diverse, inclusive, and harassment-free workplaces, pay equity initiatives, and ethical supply chains)
- Securing ESG-related tax advantages (optimizing tax advantages in transactions achieving ESG goals)
But companies are not the only ones paying attention to the quickly growing world of ESG. With shareholder advisory firms, environmental groups, stakeholders, government regulators, lawmakers, rating agencies, and lenders more closely scrutinizing ESG-related everything, there are some key issues for tech companies to consider when adopting an ESG strategy.
The E: Environmental
- Ten years ago, few companies outside the energy industry were even measuring their greenhouse gas (GHG) emissions, much less charting a road to net-zero emissions. But today we are witnessing a sea change, with tech companies releasing detailed reports on what they are doing to promote net-zero emissions in their products and supply chains. While Europe and Asia have favored a more proscriptive regulatory environment in the past, the United States historically has allowed companies to make official statements only about things that are material to its business. The current US Securities and Exchange Commission (SEC) is paying far more attention to these company reports and has proposed moving to mandate disclosures on environmental actions.
- Not many countries in Asia have committed to net-zero targets or strategic national plans yet, while the United States and Europe tend to have more robust climate-related regulations in place. Many tech companies in Asia have not released voluntary disclosures related to environmental plans or emission levels, which tends to draw the attention of enforcement bodies.
- ESG initiatives in Asia are largely led by governments for a wide-ranging, top-down approach, as opposed to a more bottom-up, grassroots approach in the United States. The Chinese government is faced with the challenge of creating a comprehensive strategy that is applicable to companies across very geographically and climatically diverse regions, cities that range from rural areas to more wealthy urban areas with advanced infrastructure, and a very culturally diverse population that comprises a multitude of ethnicities and languages.
The S: Social
- The rules around the “S” of ESG are even more amorphous, as there is a general push for more diversity from stakeholders and shareholders, but very little in terms of mandates or government regulations in the United States. The same holds true in Asia, where diversity tends to focus on gender and not on racial diversity. Large multinational corporations, including banks, life sciences companies, and tech companies, are driving the demand for more data related to diversity. This creates a challenge around privacy concerns in both the collection and the use of that data, especially from the employees themselves.
- By committing to their workforces’ well-being, many companies have seen a positive impact on their long-term business by reducing turnover and positively engaging with their community. But there are also concerns that increasing employee wages or allocating resources to diversity and inclusion initiatives could take away profits from a company’s bottom line, at a time when a number of economies are showing economic uncertainties and less positive economic indicators.
- After the Uyghur Force Labor Prevention Act became effective in June 2022, countries and companies doing business across the Asia Pacific are more closely reviewing where they source their goods to ensure workers across all supply chains are treated ethically. It has also significantly affected tech companies as several key components for the world’s tech products are manufactured in scrutinized regions in China.
The G: Governance
- ESG disclosures are driven by a number of factors, including to share positive or socially impactful outcomes, to avoid negative public relations, to appease activist shareholders, and to fulfill contractual requirements. But those disclosures are, in part, what drives an uptick in regulations and standards because there is currently little uniformity in the way individual companies report disclosures.
- In November 2021, the International Financial Reporting Standards Foundation announced a new International Sustainability Standards Board to be charged with developing global ESG disclosure mandates. In July 2021, the Global Reporting Initiative announced it was working with the European Union on sustainability standards. In June 2022, China published its first ESG disclosure standard, the Guidance for Enterprise ESG Disclosure, which has a strong focus on Chinese laws, regulations, and policies. Other countries in Asia, including Singapore, Hong Kong, Japan, and India, have issued new or more stringent climate change or sustainability report requirements for public companies in the last two years. And in the United States, both the SEC and the Department of Labor are taking the lead on more detailed disclosure mandates.
Tech companies play a unique role in this global transition to embracing ESG. It is not just that tech companies need to consider ESG as part of their own business strategies; the ESG movement needs tech companies to be successful. With a focus on digital transformation and IT innovations in order to meet ESG objectives, new technology will be the lynchpin for nearly all companies to improve their products and processes to meet ESG commitments.
For more details on why technology companies should care about ESG issues, please see our full presentation, which is part of our 2022 Asia Technology Innovation Series.