Whilst there are many industries that you could argue have more work to do, the tech industry is far from green when it comes to ESG. It will undoubtedly have a role to play in helping to solve some of these pressing issues through technology, but like all industries, it should also do more with ESG reporting and striving to improve its ESG credentials.
In part one of this five-part series on the tech industry and ESG, we’ll focus on what ESG is and why it’s important…
What is ESG?
At its core, ESG reporting looks at a company's impact on the environment and society, and it covers everything from ethical supply chains to data protection. ESG reporting is typically broken down into three categories:
- Environmental: This includes a company's impact on the environment, such as carbon emissions, pollution, and waste
- Social: This covers areas like customer, community, and employee relations, as well as supply chains and health and safety
- Governance: This focuses on how a business is governed, including board practices, business ethics, board diversity, executive pay, and compliance
Why is ESG important for tech companies?
ESG is becoming increasingly important for tech businesses of all sizes, and there are several reasons for this outside of simply making the world a better place. We’ll touch on others throughout this five-part series, but here are three of the key factors driving the shift towards ESG reporting in the tech industry:
New and Existing Employees: You only need to look at the popularity of share option schemes within the tech industry to understand that human capital is often a tech company’s most important asset. However, tech companies that fail to prioritise ESG may struggle to attract and retain top talent even with the allure of equity. This is especially true with recent KPMG research finding that one in three 18 – 24-year-olds have rejected a job offer based on the company’s ESG record.
Consumers: Failing to focus on ESG can put a company at risk of reputational damage and losing business. For B2C tech businesses, this can be especially true as consumers may not only boycott brands due to ethical reasons, but can also easily use social media to amplify their criticisms. However, losing business due to ESG credentials is also becoming more prevalent with B2B businesses too. This is partly due to the fact that many ESG frameworks cover a business’s supply chain and the businesses they partner with too, so it results in companies more frequently needing to prove their ESG credentials to win work, especially within the public sector.
Investors: In the tech industry, it’s commonplace that businesses will look for investment externally and it will become increasingly common that companies will need to demonstrate their ESG credentials as part of this process. For earlier stage businesses, this will be due to the ethical preferences of individual angel investors, but for later stage tech businesses it could be due to the risk assessment process for VC firms. Put simply, if your tech business doesn’t report on ESG or performs poorly in this area, it may be viewed as having high-risk exposure and ultimately being a less attractive investment by many investors.
In our next article, we'll delve further into the importance of ESG reporting for tech businesses and explore the environmental elements. To make sure you receive the next blogs in this series, subscribe to our tech mailing list here.