Our society has been reshaped by the pandemic, and for tech firms this means a fresh approach on how to conduct business with a greater emphasis on environmental, social and governance (ESG) matters. Put simply, today’s stakeholders will be looking beyond the balance sheet.
So what exactly does ESG mean? Here is a brief overview:
• Environmental: tackling climate change, lowering carbon emissions and looking after nature.
• Social: the relationship between a business and its employees, suppliers, customers and the local community.
• Governance: management, shareholders, executive pay and financial controls.
When it comes to how ESG reporting affects tech companies, we’ve outlined five key factors…
1. Social responsibility & attracting employees
When firms think of ESG, they often focus on the ‘environmental’ factor which is still a big factor for tech companies (the tech industry contributes 2-3% of global emissions according to the UN), but this can often mean the social aspect is absent from their ESG strategy. Many studies have shown that companies with a higher social responsibility find it easier to attract and retain talent, which can be notoriously difficult in a competitive industry like tech.
Diversity is key, especially as data from Tech Nation showed that companies with diverse boardrooms also have a higher turnover than those with non-diverse boards. However, the same data highlighted a lack of diversity in the sector, as only 23% of tech directors and 19% of tech workers are women, making it clear there’s work to do to close the gender gap in tech.
2. Attracting investment
Commonly, tech companies will seek external funding at some point in their company journey. Therefore, it’s important to know that an increasing majority of investors view ESG reporting as a key factor in their investment criteria, along with business performance.
When it comes to governance, stakeholders need to see that management employs robust practices around leadership, board recruitment, conflicts of interest, executive pay, and financial reporting. Whilst many investors will adopt different ESG frameworks (and many companies adopt different ESG standards and metrics which makes it harder to benchmark), there is a large overlap between these. It’s key that ESG reporting isn’t a side project and it’s instead incorporated into a company’s strategy and on the agenda in board meetings.
3. Stakeholder expectations
The expectation of stakeholders like consumers and their ability to voice their concerns has never been higher. They will also be drawn toward businesses that can show how they are making a difference in the world, rather than focusing solely on profits (clothing brand Patagonia is a great example of this). Stakeholder capitalism is the philosophy that businesses have duties beyond dividends for shareholders.
To avoid being accused of greenwashing, tech companies need to prove they act responsibly when it comes to environmental, social, and governance factors. All three of these could contribute to consumer backlash against tech companies, which isn’t uncommon, the media even coined the term ‘techlash’ back in 2018 due to the hostility shown towards these firms.
Tech companies must find a way to walk the tightrope of having an ambitious strategy for growth whilst also lowering their carbon footprint and environmental impact.
4. Supply chain management & winning work
Many tech companies may look at their practices and believe they have nothing to be concerned about from an ESG standpoint. However, it isn’t just their own practices that form part of the wider picture for ESG, but also the suppliers that they work with. Therefore, tech companies should seek to review their supply chain and the ESG performance of those within it.
This also works both ways – for many tech companies, they’ll be looking to sell their product or services to larger firms. These larger firms will have even more pressure to report on ESG including their supply chain, so tech companies may find that ESG increasingly factors into their success in winning these contracts (this is especially true for winning work in the public sector).
5. Managing change
Recent world events have been a wake-up call for businesses that have been slow to react to changing circumstances. From adopting new ways of working to enhancing cyber security, tech firms need to identify risks and formulate contingency plans.
ESG reporting can help to review current operations and build in safeguards and procedures to deal with the unexpected and to avoid risks such as reputational damage. Prepared businesses will be a safer investment as they will be efficient, resilient and ethically sound.
ESG reporting brings many challenges to tech companies that they need to deal with and it’s an area that will only become a bigger focus over the coming years. Within our network at UHY East, we’re able to support with ESG strategy, audits and the ongoing reporting that it requires. For more information, please contact James Foster on firstname.lastname@example.org or your usual UHY adviser.