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Commentary

Beyond Profit: The Growing Importance of ESG in the Tech Industry

Urtė Karklienė, Sustainability Manager at Oxylabs, says that the technology sector must fully integrate ESG principles not only to reduce compliance risks, but to set the industry on the path to long-term success. 

A decade ago only a handful of companies, primarily in the energy sector, were measuring their greenhouse gas (GHG) emissions and planning for net zero. Over the past ten years, however, ESG principles have become a central topic of discussion among corporate executives, regulators, and consumers.

In recent years sustainable investment funds began demonstrating superior performance and decreased investment risks to conventional funds. Additionally, according to a recent IBM study, more than 70% of companies see ESG factors as a revenue enabler – direct contributor to increasing the revenue of a company. Many are also observing a significant transformation – companies are publishing comprehensive reports outlining their efforts to achieve net zero emissions within their products and supply chains.

The shift towards sustainability is not just a matter of compliance, but a strategic necessity for companies seeking to thrive in the evolving global market. As sustainability becomes an increasingly critical concern for various stakeholders, the tech sector must acknowledge its role in driving positive change. By proactively integrating ESG practices into their core strategies, tech companies will not only mitigate risks but also unlock new opportunities for innovation, growth, and gain a competitive advantage.

Environmental factors

One of the fundamental causes of the triple planetary crisis (climate change, loss of biodiversity, and pollution) is unsustainable consumption and production patterns. As tech companies consume a lot of resources for their equipment and many servers, which, in turn, use large amounts of energy, their environmental cleanliness and supply reliability are crucial.

These companies may need to consider issues such as reducing their carbon footprint, managing e-waste, and ensuring responsible sourcing of raw materials. According to research made on the Sustainable Development Goal (SDG) number 12 – “Sustainable Consumption and Production” – global reliance on natural resources increased by over 65% from 2000 to 2019, and the majority of electronic waste is not being managed safely.

Additionally, a recent proposal for the Corporate Sustainability Due Diligence Directive has been submitted. The directive will apply to companies such as ones engaged in mining and wholesale trade in mineral resources. Although it does not directly affect tech companies, their supply chain will be affected, and the IT sector will also have to consider what and where they buy from.

Technology companies in the European Union that meet certain criteria may also be subject to the Taxonomy for sustainable activities, a classification system meant to identify whether investments are environmentally sustainable. Taxonomy for sustainable activities can apply to tech companies if the company’s economic activities are described as those that make a significant contribution to at least one of the EU’s climate and environmental objectives, while not significantly harming any of the environmental objectives and meeting of minimum social safeguards.

However, we can suppose that an organisation’s field of activity is not included in the Taxonomy based on the economic activity classifier. Not being included in the Taxonomy might impact the company’s credit ratings, increase loan interest rates, and they may face other issues. Oil extraction activities, for instance, are not included in the Taxonomy since it does not fit the criteria for sustainable activity; as a result, corporations in such activities may face various constraints on their operations.

Social factors

Technology companies also have a unique impact on social issues. For example, tech companies may need to consider issues such as privacy, cybersecurity, and digital inclusion which are part of ESG goals. Additionally, many of these companies rely highly on human capital and, therefore, may need to consider issues such as diversity, equity, and inclusion (DEI) to attract and retain top talent.

Another consideration that tech companies should make is related to devices such as phones, computers, etc. To produce these devices, various materials like cobalt, lithium, and other metals must be extracted, for which, regrettably, there are instances where child labour is utilised in the process, a practice which raises human rights concerns.

According to the UN Department of Economic and Social Affairs, 1 out of 10 children is involved in child labor worldwide. Thus, to be sustainable and tech-savvy, companies must take care not only of the features of the equipment but also of the way those devices are made and ensure decent work and economic growth opportunities.

ESG factors can also lead to innovation and business opportunities. For example, developing sustainable technology can lead to cost savings and efficiency gains, while investing in employee well-being can lead to higher productivity and retention rates.

The rise of ESG-aware investors and consumers is also a significant driving force behind the need for tech companies to consider ESG factors. There has been a shift in investor preferences in recent years, with a growing number of asset managers and institutional investors seeking to align their portfolios with companies that uphold strong ESG values.

This trend reflects an understanding that ESG performance often correlates with long-term financial success and risk mitigation. By embracing ESG principles, tech companies can attract the support of these investors, ensuring consistent financial backing and market stability.

Similarly, customers are growing more sophisticated in their selections, preferring products and services from businesses that benefit society and the environment. Such a change in consumer behaviour is especially relevant for tech companies, given their far-reaching impact on the world.

Governance factors

Governance factors are essential for all companies, but technology-based businesses may face unique ESG challenges in this area. For example, with the usage of artificial intelligence (AI) and machine learning (ML), tech companies may need to examine concerns such as data privacy and security, as well as ethical implications.

Another crucial factor motivating tech companies to prioritise ESG practices is the evolving regulatory landscape. In response to rising worries about climate change, data privacy, and labour rights, governments and regulatory organisations throughout the world are enacting stronger ESG-related rules.

The European Parliament and European Council declared the adoption of an updated Effort Sharing Regulation, introducing a novel mandate for all EU countries to decrease greenhouse gas emissions by 2030. This revision also increases the EU’s collective emissions reduction objective for 2030 to 40%, in contrast to 2005 levels, which marks an improvement from the previous target of 30%.

With the new European Commission’s decision, large European corporations will soon have to publish their greenhouse gas emissions, water use, waste generation, and other various aspects in order to be compliant. In addition, they will also have to provide information on how they are managing these environmental impact factors. All of this data must be reported clearly and concisely, which can be a challenge for companies that are not used to disclosing such information.

The new ESG reporting rules are designed to give investors a better understanding of a company’s environmental impact. Investors may make better informed judgments about where to allocate their capital by knowing a company’s vulnerability to climate change and other environmental hazards. Ultimately, these new reporting requirements should help move the needle on corporate sustainability practices.

Many businesses (around fifty thousand companies in the EU), including tech companies, must remain proactive in meeting these requirements to avoid potential fines, penalties, and reputational harm. By actively addressing ESG concerns and demonstrating a commitment to compliance, tech companies can lower the risks associated with regulatory violations while maintaining a solid standing within their industry.

Furthermore, engaging in transparent reporting and disclosure practices around ESG performance can help tech companies build trust with stakeholders, including investors, customers, and regulatory bodies. By voluntarily adhering to globally recognised reporting frameworks such as the Global Reporting Initiative (GRI) or the Sustainability Accounting Standards Board (SASB), technology firms can demonstrate their commitment to accountability and ethical decision-making.

ESG reporting

Companies in the tech industry are not exempt from the rising tide of ESG reporting. In fact, as sectors renowned for their innovation and forward-thinking approaches, they are often expected to take the lead in areas such as sustainability and governance.

Tech businesses should think ahead and start reporting ESG metrics now, before it becomes mandatory. Doing so can provide assurance to investors and stakeholders about the company’s validity and long-term viability in an increasingly ESG-focused business environment.

For instance, a web intelligence acquisition solution and premium proxy provider – Oxylabs, has recently released its second impact report. This signifies an important step in their ESG journey, showcasing the company’s commitment to sustainable and responsible business practices.

Time for action

As regulatory frameworks evolve and place a greater emphasis on ESG performance, technology companies must adjust proactively while meeting public expectations around sustainability. By adopting ESG principles into their fundamental business strategy, tech organisations can not only reduce risks but also capitalise on potential for innovation, cost reductions, and long-term success.

The time for action is now – embracing ESG factors is no longer an option, but rather a necessary component of a tech company’s journey towards a sustainable and profitable future.

The article was co-authored by Ugnė Butinavičiūtė, Junior PR Manager at Oxylabs

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