Environmental, Social and Governance (ESG) measures have become undeniably mainstream when assessing business performance.
Companies are facing unprecedented stakeholder interest with 90% of world’s GDP now covered by net zero commitments; a tsunami of ESG-related regulation and soaring global energy prices.
ESG should be built into a digital strategy when digital transformation is already having a significant impact on ESG in two important areas – data and disclosure, and resource efficiency.
Unprecedented demand for ESG disclosure
In recent years, ESG has shot up the agenda. A key driver is increasing awareness of the link to financial materiality. The release of the Taskforce for Climate-related Financial Disclosures (TCFD) guidelines in 2017 by the Financial Stability Board sent a clear signal to the market: climate risk is investment risk. During the pandemic, ESG-focused funds and companies outperformed peers (S&P), with factors such as better supplier management and employee engagement paying off.
The largest reallocation of capital in history is needed to meet net zero, with an annual increase of $3.5 trillion towards low-emission assets. (McKinsey). At the current growth rate, ESG-mandated assets will represent half of all assets under management by 2024 (Deloitte).
The rapid growth of ESG investing and sustainability claims from companies has spawned a wave of ESG regulation, as legislators look to set common standards and reduce greenwashing.
From burden to opportunity
The good news is that ESG data is already starting to leverage digitalisation. By nature, ESG sits across the entire business, and needs to bring together disparate data managed by different functions. Once organisations understand what data they need and where this sits, they can:
· Connect and automate data collation and analysis, from existing sources like human capital management (HCM), centralising disparate datasets
· Map against common ESG standards, frameworks, and regulations
· Manage and analyse datasets to drive strategic decision-making
One example of how this data can be used to drive a business’ ESG strategy is carbon footprint measurement. IFS hears from customers that emissions reporting is a top ESG priority. That’s why our first step towards helping customers with ESG disclosures is through emissions calculation.
To do this, we are developing the IFS Cloud Emissions Tracker. It initially allows for Scope 1 and Scope 2 emissions calculations of a company’s carbon footprint, to help customers manage their climate impact. The primary differentiator is that the IFS Cloud Emissions Tracker focuses on customer data already in IFS Cloud, making the data collection process simpler.
Lifecycle approach: efficient, effective use of resources is a ‘win win’
Another intersection of ESG and technology is around efficient use of resources. The world’s energy needs are set to double by 2050. Carbon pricing is surging, with carbon trading seen as a one-way bet. Investors have begun trading in water futures, where demand already outstrips supply.
Digital capabilities are crucial to this. Take Volvo Group Operations & Solutions, whose remanufacturing process, enabled by IFS, focuses on a circular economy through servicing, maintaining and repairing to increase the utilisation rate of all materials. Servitisation offers the potential to decouple growth from resource use.
Rolls-Royce, IFS Change for Good winner from 2021, is a leader in servitisation. In the 1990s, it made the revolutionary move from a manufacturer of equipment to a provider of long-term services, through a dollar-per-flying hour model. IFS plays a vital role in realising Rolls-Royce’s ‘Intelligent Engine’ vision, enabling the ‘blue data thread’ of data connectivity between airlines and Rolls-Royce. This allows the business to improve the time between engine overhauls by 45% and avoid the carbon associated with this process, having both a bottom line and ESG impact.
ESG leaders embrace digital to drive positive change
Technology is already transforming the sustainability landscape, especially for data, disclosure and resource management. Companies can leverage this by considering ESG as part of their digital transformation strategy. Effective use of technology is the only way to keep up with the pace of change, especially for data management and disclosures, where simplification and automation will be key.
By Sophie Graham, Global Sustainability (ESG) Director, IFS