ESG’s struggles are Big Tech’s problem

It’s on Big Tech to save ESG

Big Tech has been quick to try to profit off of the surge in ESG investing.

But the effort faces a major credibility challenge. Now it’s up to the sector to help shore up trust in a concept that many tech companies have adopted as a key cultural tenet, and to persuade other businesses to maintain investment in it.

• For the last several years, opposition to ESG investing seemed like background noise as the effort matured. But as scrutiny over key aspects of the concept intensifies, the increasingly vigorous (and often bad faith) campaigns to discredit ESG and prevent it from becoming a new global accounting standard appear to be gaining steam.

• And now, as businesses float in the regulatory doldrums, the evaluation model aimed at analyzing an organization’s impact when it comes to environmental, social, and governance issues in the same manner as financial performance is in a precarious state.

That’s bad news for the tech industry. The sector has long embraced ESG reporting as a foundation of operations, or sometimes just as a marketing tactic. Still, the industry is banking on the maturation of the concept as a key future revenue stream.

• Unlike quarterly financial disclosures, ESG is not yet an established reporting standard for corporations, though regulations are coming. Without a common standard in place, there’s little ability to actually verify whether corporate statements are accurate or comparable in the same way that financial statements are.
• However, governments around the world continue to move forward with new ESG-focused reporting mandates and guidelines, a move that could add some much-needed stability for businesses, as well as for governments, investors, and end customers.
• But there’s uncertainty as to when that will happen, given the SEC has already delayed its own climate disclosure rulemaking.

Right now, it’s chaotic. The absence of formal guidelines hasn’t stopped businesses from broadcasting their results. But the lack of clarity around what, exactly, these reports and other ranking criteria are based on, along with rampant “greenwashing” efforts, has sowed substantial confusion.

Conservative politicians who oppose ESG goals are pouncing. And as backers work to restore ESG’s credibility, businesses are revamping or flat-out abandoning their strategies; investors are pulling back as the number of new funds plummet amid greater government scrutiny; and Silicon Valley is closing its vaults.

• A plateau in progress is not unexpected and may even be necessary to reestablish ESG’s credibility. But there are troubling developments that threaten to undermine the whole rationale behind the concept.
• For example, behemoth asset manager BlackRock is facing blowback from Republican state attorneys general and treasurers who claim the firm is prioritizing a “woke political agenda.”
• BlackRock and many ESG funds, though, include oil and gas companies despite the obvious environmental impact of their operations. Arguments to include fossil fuel companies more prominently have gained steam, though, as they rake in record profits.
• And with a possible recession looming, it’s unlikely companies will be able to sustain the same level of investment in ESG-related initiatives.

The current struggles are sure to wipe up some of the saliva Big Tech has drooled over the ESG surge. Software vendors will play an important role in helping organizations gather the immense amount of information needed to adequately report on ESG progress.

• That step will get increasingly complicated as businesses look to include data beyond their own operations into areas like the supply chain. Despite Big Tech’s own struggles with overseeing the procurement process, it’s an area where vendors like SAP and Coupa can play an important role. Overall, the market for ESG software is expected to reach $2 billion by 2030.
• And as businesses look to meet loftier climate targets, clean tech should continue to garner ample investment even amid a harsher funding environment.

IT vendors are trying to capitalize on what is a dream scenario for them: a vital cause with immense marketing potential that also promises to be one of the more expensive compliance burdens for businesses in recent memory.

• The information needed to evaluate factors like greenhouse gas emissions, for example, is stored in databases across the company managed by tech providers. Now those same vendors, as well as startups, are building platforms that can span those many storage centers, making analysis easier.
• Beyond corralling corporate information, Salesforce recently unveiled a new carbon credit market, allowing customers to buy what has become an important, but still insufficient, way for businesses to tout environmental progress.

While it’s unlikely that corporations shun their ESG goals entirely, declining investment could ripple through the tech sector, affecting everything from startup funding to how much Salesforce or ServiceNow makes in sales for new ESG-focused products.

The tech industry has long claimed to embrace many of the causes that are central to the concept of ESG. And now it’s beginning to profit from others jumping on board. As momentum around ESG skids, Big Tech has both a moral and business imperative to act.

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