For anyone who missed this memo: Conscious consumerism is in. And companies that aren’t getting the message will be left in the dust by those that do.
From the boardroom to the shopping cart, a wide array of stakeholders are looking to environmental, social and governance (ESG) criteria to help decide where to put their dollars. Business sustainability, in particular, has come under the microscope in recent years as a result of the exponentially growing focus on climate change. CIOs and other leaders would do well to understand ESG and sustainability trends for business and take proactive action to get ahead of the competition.
Sustainability and ESG are here to stay
The corporate world is going through a rapid pace of change in how it thinks about and addresses sustainability and other ESG investing areas, said Simon Mingay, a research vice president at Gartner. Businesses are moving to address these needs differently — sometimes by demonstrating leadership for others to follow and, in other cases, simply by keeping up with new regulations and industry norms.
CIOs have an important role in business responses to sustainability concerns and other ESG-related issues.
“We live in a more technology-enabled and technology-dependent world than ever before, leaving CIOs with a great opportunity and an enormous responsibility,” said Jahidul Khandaker, former senior vice president and CIO at Western Digital and now healthcare IT vendor GE HealthCare’s CIO. “CIOs must balance … new [market] demands with how we respond to critical issues facing the world today, especially around the environment.”
Being proactive in these areas is critical.
Simon MingayResearch vice president, Gartner
“Every enterprise is on the pathway to net-zero whether they have decided this for themselves at this point or not,” Mingay said. “The only choice they have left is whether they want to lead, follow or get drawn in kicking and screaming.”
Depending on how companies decide to engage on ESG and sustainability, CIOs will have different levels of involvement, Mingay said. That can range from supporting business leaders in other departments with the right information to taking on a more direct role in managing sustainability transformation efforts, much like other digital transformation projects.
To that point, here are 10 ESG and sustainability trends that CIOs, IT teams and business leaders need to be aware of, plus advice and ideas for companies on how to address them.
1. Sustainability impact measurement
Many organizations are just starting on a sustainability journey, which includes first steps such as defining terms within the context of the particular business and beginning to measure sustainability impacts.
A growing number of enterprises are undertaking an ESG materiality assessment that inventories the most significant impacts and concerns the company needs to address, Mingay said. Top sustainability categories to examine include greenhouse gas emissions and energy usage.
Sustainability is a component of a company’s broader ESG efforts, and Mingay said mapping all potential ESG issues onto a quadrant to help prioritize initiatives based on their importance and level of impact is a valuable step. What’s noted in the top right quadrant would reflect problems with the biggest impact and the most scrutiny, while those in the lower left are the least impactful and scrutinized for an organization. For example, waste disposal would be a much bigger issue for a mining company than a call center. In contrast, the call center might be more concerned with its IT power usage, which likely would be a smaller consideration for a mine.
Mapping ESG and sustainability priorities “is fundamentally important because this is your crucial governance artifact where you need to focus,” Mingay said.
The materiality assessment can help the CIO identify the ESG data that needs to be captured and integrated into various analytics workflows, he said. It also provides a basic understanding to help the CIO guide conversations across the organization to determine the best way IT can contribute and get involved, such as using IoT technology to improve energy efficiency.
2. Greenhouse Gas Protocol frameworks
Scientists across the globe agree the world faces a climate emergency that demands immediate attention. For companies, researching common standards and frameworks is an important step in taking the right actions to support green computing initiatives and other sustainability efforts.
For example, CIOs need to familiarize themselves with the Greenhouse Gas Protocol frameworks, which standardize how enterprises report and manage greenhouse gas emissions, Mingay said. Learning the basics of what scope 1, 2 and 3 emissions mean is a good first step.
“If a CIO does not understand the specifics of the enterprise’s goals and targets across all three scopes and the timeline [required to address them], then they’re going to be floundering around addressing things that aren’t important right here, right now, or [they won’t give] sufficient attention to those things that are important,” Mingay said.
3. Circular economy
From consumers to software vendors, an increasing number of stakeholders are interested in extending the product lifecycle via the circular economy model.
CIOs and other leaders need to explore how to incorporate a circular economy approach, such as ways to innovate product design, Mingay said. In particular, CIOs need to pay more attention to the end-of-life aspects in how they build IT systems.
Historically, most CIOs could stage broken products out of view until sending them off for disposal. But new regulations are affecting how companies manage that.
“You have to go back and start looking at strategy, architecture and vendor choices in terms of the end-of-life disposal process,” Mingay said.
CIOs will need to develop ways to measure what percentage of e-waste is reused, recycled or disposed, he added. They also need to balance security measures, such as shredding electronic media, against sustainability issues.
4. Climate adaptation
Going greener is critical to climate change mitigation, but some organizations are augmenting that with a focus on climate adaptation as well. While mitigation focuses on prevention and reduction of climate change, adaptation involves alterations to accommodate its current and future effects. Initiatives in Miami to raise street levels are an example of the latter.
Businesses need to address climate adaptation as part of their risk mitigation strategy, Mingay said. Climate adaptation requires exploring all the different ways that climate change could disrupt operations, supply chains and customers and how business and IT leaders will deal with those disruptions.
From increasing wildfires to more frequent hurricanes to longer droughts, the long-term effects of climate change will increasingly be felt by business operations. “Underlying risk models are changing under [business and IT leaders’] feet,” Mingay said.
CIOs may need to collaborate with other teams to develop a more agile risk modeling process that takes climate change into account. They also need to streamline how risk models tie into business continuity and disaster recovery plans and operational resilience models, Mingay said. This requires more frequent and detailed conversations with critical IT vendors, cloud providers and supply chain partners to identify new risks and plan strategies to communicate and address them.
5. Supply chain sustainability
Creating a more sustainable supply chain will be a critical initiative for most companies — and a complex and difficult challenge.
Increasingly, CIOs will be called upon to connect the data gaps to help achieve sustainability goals across the supply chain, Khandaker said. These efforts often need to combine data from a company’s ERP and logistic applications with third-party environmental impact data gleaned from reporting tools offered by organizations such as CDP (formerly the Carbon Disclosure Project).
During the pandemic, when Khandaker was at Western Digital, a data storage vendor based in San Jose, Calif., his team built the IT infrastructure to facilitate supply chain consolidation, analysis of freight carriers and optimized routing to reduce distribution costs and carbon footprints. He said they approached the project with three main goals in mind: ship finished goods more efficiently, proactively predict logistics challenges and improve on-time performance.
The team built an internal logistics app that combined data integration, data quality, AI tools and direct integration with other logistics applications. For example, incoming data would sometimes vary from what was expected. So, they developed an anomaly detection engine to identify problems and tools to automatically correct data when possible or alert the appropriate business teams when that wasn’t. This ensured the system could operate with reasonable accuracy, Khandaker said.
His team also developed machine learning algorithms to identify when lead times changed and then propagated these changes to the appropriate planning tools. In addition, they built other tools for characterizing differences in freight lanes, which reflected different transport providers, modes and routes to optimize costs and reduce the number of shipments. Shipment consolidation is an important goal with many nuances. For example, it might be more effective to ship parts of an order early to consolidate them with another order to the same customer or a nearby customer, said Khandaker, who left to become CIO at GE HealthCare in October 2022.
The work of his team at Western Digital provides a snapshot into just how complex improving supply chain sustainability is.
6. More honest carbon footprint disclosure
One dilemma facing companies is how and what to disclose about their carbon footprint and other ESG metrics. Some business and IT leaders may want to paint a rosier picture by minimizing their reported impact. That’s a mistake.
Emerging frameworks for greenhouse gases ask companies to be thorough in capturing the full extent of their emissions, said Rita Soni, principal analyst at research firm Everest Group. “The pledges are based on reducing your carbon footprint rather than the absolute numbers,” Soni said.
It is also essential to think about how companies can present these results across various indicators and audiences, she said. While Scope 1 emissions may be more tradeable on carbon exchanges, making meaningful changes on Scope 2 and Scope 3 ones could also have a positive impact on relationships with regulators, investors, employees and citizens.
Some of the largest banks are starting to explore how they can channel indirect investments out from more carbon-intensive industries toward industries that are actively reducing emissions, Soni said. And some of Everest Group’s enterprise clients are asking how they can improve communication with employees around sustainability metrics and support them in taking a more active role in sustainability programs within the company.
Similar frameworks for other ESG measures might likewise reward progress rather than punish companies for their current environmental impact.
7. Green IT
IT systems and services that prioritize environmental sustainability are becoming more important as part of the larger climate action movement. CIOs need to focus on creating green IT environments, Mingay said. That’s particularly true in tech-heavy industries such as banking, finance and telecommunications, where IT investment has an outsized impact on the company’s carbon footprint.
Government action is also giving this area a push.
For example, green IT is a bigger priority for CIOs in the wake of the U.S. Energy Act of 2020, which raised power usage effectiveness (PUE) requirements, said Vidisha Suman, a partner in the digital transformation practice at management consultancy Kearney.
Some of the top objects of PUE programs include migrating to more sustainable energy systems, better usage tracking and more automated energy controls. Many companies are working to adopt green computing best practices, such as redesigning or consolidating data centers, migrating to the cloud and autoscaling workloads, to minimize their energy footprint. And AI tools are helping to improve how HVAC systems run in order to reduce power consumption.
8. Impact sourcing
Sustainability is a critical aspect of a company’s ESG efforts, but it’s not the only one. Addressing workplace bias and creating better diversity, equity and inclusion (DEI) strategies has become a critical focus for many organizations. Few companies can truthfully claim to have addressed inequality, however, and most organizations need to work even harder to give fair opportunities to all. One ESG trend that CIOs and business leaders should understand in this area is impact sourcing, which prioritizes giving business to organizations that focus on employing marginalized and disadvantaged populations.
Everest Group has seen a substantial uptick in clients asking for information on impact sourcing, Soni said. These efforts build on more widely known workforce programs that balance gender and racial diversity to include people who have a disability and other groups that might face challenges in the traditional hiring process. In that case, the HR team needs to work with the CIO to set up a program to measure the desired objectives. For example, there could be a goal that 50% of new hires come from pools of people with only a community college degree or who lack a credit score. Such programs also need to include training and support to give new hires the appropriate jumpstart to succeed on the job.
9. Responsible AI
As more companies turn to AI to automate processes, the degree to which algorithms can cause business harm is growing — and quickly. Regulators and consumers are increasingly calling for responsible and transparent AI. Many of the recent advances in AI are built on black-box algorithms that deliver impressive results. But it’s not always clear how and when they break or when they might amplify existing biases.
Now is the time for CIOs to operationalize their IT infrastructure to support meaningful AI ethics goals, said Sanjay Srivastava, chief digital strategist at professional services firm Genpact. “Think about the holistic process instead of just the AI piece,” Srivastava said.
It’s essential to set guardrails around where companies can apply AI, he said. CIOs also need to think about explainability for the AI-driven decision process rather than just the decision itself.
For example, when Srivastava’s team is doing financial risk analysis on a lending portfolio, they build in the ability for business users to click to understand why the AI model gave a specific recommendation. Sometimes the answer is hidden in the footnote of a financial report.
“By providing the ability to click to see that footnote, we help the decision-maker be more confident about the AI model’s prediction,” he said.
10. Better ESG analytics
The question of what data companies should capture for various types of ESG reporting is an emerging area.
The data challenge is significant because ESG-related data is often fragmented within the organization, and external data needs to be procured and co-mingled with internal data sets, said Vinod Prashad, managing director of digital and analytics at consulting firm SSA & Company.
Vinod PrashadManaging director of digital and analytics, SSA & Company
“There’s limited historical organization experience with ESG KPIs and that in turn calls for a rigorous methodology to determine the right KPIs, identify underlying data sources and perform the necessary data transformations to calculate relevant metrics,” Prashad said.
Business stakeholders of all types are focused on sustainability and other aspects of ESG initiatives, so staying abreast of developments is key.
Eventually, all the major enterprise applications will likely support the most common ESG analytics, said Bob Hirth, a senior managing director and member of the global ESG steering committee at consulting firm Protiviti. But in the meantime, CIOs will need to integrate a patchwork of tools to meet their ESG data goals. Current applications often require enhancements or modifications to facilitate automated ESG reporting. This might also involve changes or improvements to existing ERP systems.
The security of ESG-related information is critical, too.
“Enterprises should improve data security and privacy controls to meet certain ESG disclosures,” Hirth said. “They need to be prepared for disclosure of data breaches in accordance with Sustainability Accounting Standards Board standards for specific industries.”
Urgency on ESG and sustainability, despite the complexity
If ever the statement “if it’s not one thing, it’s another” felt relevant, it’s today. The problems facing CIOs and other business and IT leaders truly seem never-ending. And yet, despite that complexity, companies can’t ignore the need for action. And they need to act in a thoughtful and balanced manner.
Undoubtedly, IT teams will turn to technology in an effort to tackle sustainability and other ESG concerns. However, it’s critical to remember that different technologies have their own issues. For example, training AI demands a lot of energy. Blockchain, which many will look to for supply chain sustainability help, also requires vast amounts of energy. On the DEI front, although diversity and inclusion software can help power a program, it can’t take the place of a strong strategic and cultural focus.
Still, helpful frameworks, ideas and advice on ESG and sustainability are coming to the fore. And with a major dose of social justice and climate hope, business and IT leaders can act and make real progress.
About the author
George Lawton is a journalist based in London with over 30 years of experience writing about computers, communications, knowledge management, business and health.