Strong ESG (environmental, social, and governance) practice is good for business. Greater innovation, long-term talent retention, customer loyalty, enhanced revenues, increased resilience and reduced risk have all been ascribed to a greater focus on ESG. The argument has been made and, broadly speaking, won.
However, as organisations across industries, geographies and company sizes allocate more resources toward improving ESG, the ways in which it is practiced are rightfully coming under greater scrutiny.
Different approaches to sustainability
There has been no single approach to improving sustainability performance. Individual businesses have evaluated the carbon footprint of their own operations (often by considering Scope 1 emissions), as well as their impact through customers, partners and supply chain (which is where Scopes 2 and 3 come in). Then they made strategic decisions on where best to direct their sustainability efforts.
For example, rather than focusing on decarbonising their own operations, many financial institutions are directing their efforts towards their investment portfolios and in meeting various ESG indices set by the capital markets. The financial industry is having a huge impact on sustainability in general, as it channels investments into the ‘green economy’ where eco-friendly companies create sustainable products. Banks are also influencing business customers to be more sustainable in order to have their loans approved.
The airline industry, one of the major sources of greenhouse gases, is also focusing efforts on where it can get the biggest impact — reducing the emissions created by aircraft. Airlines hope to achieve this by switching from traditional fossil-derived jet fuels to ones made from renewable sources. They are also looking to new materials to make their aircraft lighter and more aerodynamic, and hence less fuel hungry. But while lighter planes and sustainable fuels will undoubtedly have a major impact on decreasing emissions from aviation, they aren’t available yet and won’t be for many years.
The common thread here is return on investment, and it’s a logical strategy. But companies also need to go for the immediate wins and lower-hanging fruit, such as decarbonising their IT operations. In parallel, R&D needs to continue and strategies should be developed for bigger and more substantive changes to come.
Moving IT up the ESG agenda
In my experience, many compute-intensive businesses have already turned their attention to the energy consumption of their digital infrastructure. Many of these enterprises have moved workloads to the cloud to reduce their energy consumption and carbon footprint.
But less IT-dependent sectors have placed it much lower on the ESG agenda. Turning the spotlight back to the IT estate could be a good place to start for these companies. Afterall, we know that IT contributes between 2.1% and 3.9% of global greenhouse gas emissions today, largely from data centers.
Digital twins, IoT systems, edge computing, AI and machine learning can provide huge sustainability benefits. For example, many industries uses digital twins for infrastructure inspections rather than flying maintenance crews out to remote sites. AI can help understand exactly how physical resources are used, and how that use can be optimized to cut all possible waste.
But these technologies can have environmental impacts of their own. Training a single AI model can emit nearly five times the lifetime emissions of an average American car. Blockchain is also notoriously energy-intensive. Every element of the IT strategy from current hardware requirements to cloud-optimised deployments to digitalization strategies needs to be carefully viewed through an ESG lens.
A change of direction
Concurrently, we’re seeing a shift towards mandatory rather than voluntary sustainability, and regulations around corporate sustainability are getting tighter. For example, the EU’s Corporate Sustainability Reporting Directive (CSRD) is about modernizing and strengthening rules regarding the environmental and social information that companies have to report. It will require around 50,000 large companies and listed SMEs to report in line with the European Sustainability Reporting Standards (ESRS).
The EU is also expanding the scope and ambition of its Emissions Trading Scheme (ETS), which creates a price for greenhouse gas emissions thereby encouraging companies to reduce fossil fuel consumption. It is also introducing the Carbon Border Adjustment Mechanism (CBAM), which will ask producers to pay for any CO2 emissions imported through their supply chain.
As ever, it is prudent to start laying the groundwork before legislation comes into force: developing a broad strategic or even tactical response is much harder once the clock starts ticking and timetables are fixed.
Time to look again at IT
And so, with digital technology perhaps the biggest enabler in driving carbon footprint reductions, combined with the upcoming raft of sustainability legislation, we believe it is essential that IT leaders are engaged with ESG strategies across all industries. They can and should play a key role in delivering the solutions that have a long-term positive impact – on the environment as well as the business.
The time is now. The window of opportunity is open. It won’t stay that way forever.
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