For CIOs who are already wrestling with an arm’s-length list of responsibilities, the prospect of adding stewardship of their organization’s environmental, social, and governance (ESG) initiatives may seem like a daunting burden. But ESG ownership can also be a highly visible opportunity for CIOs to grow the bottom line, streamline operational efficiency, improve customer loyalty, and boost the organization’s reputation.
ESG is a broadly defined set of standards that define a company’s practices in areas such as environmental awareness, responsible employment practices, and transparent leadership principles. Once regarded mainly as a defensive strategy for mitigating business risk, these initiatives have evolved into both a regulatory mandate and a significant source of competitive advantage.
In the area of compliance, the U.S. Securities and Exchange Commission has proposed new rules that would require publicly traded companies to report and certify greenhouse-gas (GHG) emissions from their operations (Scope 1), indirect emissions from purchased energy (Scope 2), and upstream and downstream activities in their value chains (Scope 3). Pressure is also growing from investors, employees, customers, and other stakeholders for companies to adopt ESG strategies and best practices, with some mutual funds investing solely in businesses with well-defined sustainability plans.
But perhaps the most compelling argument for embracing ESG is the growing body of evidence that companies that do so are more profitable, retain customers longer, and can hire the best and brightest candidates from a young and ecologically sensitive workforce.
From risk to reward
“Just 10 years ago, sustainability was perceived as being about risk,” said Bjoern Stengel, global sustainability research lead at IDC. “Empirical evidence now shows that organizations that focus on their most material ESG issues can achieve better financial returns than organizations that don’t.”
IDC’s 2022 Global Sustainable Strategies and Technologies Buyer Value Survey found that the top reason executives buy sustainability-focused technology is to drive business value. Software that supports sustainable practices was also found to play an important or very important role across all use cases related to internal operations. And nearly 60% of executives said the CIO plays a “major role in enabling the collection, measurement, and validation of ESG projects, outcomes, and impact.”
The reason CIOs figure so prominently in these initiatives is apparent when considering the data-intensive nature of ESG reporting. Measuring a company’s performance against sustainability goals requires gathering massive amounts of information from multiple parts of the organization as well as from outside sources such as suppliers and energy providers. Many of these data sources have not historically been part of the IT portfolio. Other new data types and sources that may need to be gathered include:
- Scope 1 and Scope 2 emissions from direct energy consumption as well as emissions related to the use of electricity by IT assets such as data centers and employee equipment
- Scope 3 emissions from sources throughout the value chain, including suppliers, employee travel, and technology vendors
- Human resources data such as diversity metrics, demographic profiles, gender balance statistics, opportunities for promotion, and benefits participation
- Executive compensation trends, cyber-risk exposure, compliance training, and privacy practices.
- Sustainability practices of suppliers. That means asking questions about their commitment to carbon neutrality, employment practices, and even whether their use of artificial intelligence is ethically governed.
Many of these data sources are not new, but IT departments are now being tasked with capturing, refining, and incorporating the data into a context that satisfies regulators and stakeholders.
All this requires CIOs to orchestrate greater alignment with their C-suite colleagues. Collaboration has become more important for CIOs as cloud and other technologies play an increasingly vital role in embedding technology more deeply in the business functions, and ESG initiatives are no exception. CIOs need to work with key stakeholders, including the CFO, COO, CHRO, chief sustainability officer, chief data officer, and chief compliance officer, to set ESG goals, determine ESG-enabling technology investments, and operationalize sustainability in existing processes. CIOs must also develop expertise in wrangling disparate data types into reports that inspire confidence among their peers and stakeholders.
“CFOs and controllers are being asked to disclose new sets of data that go beyond financials, and the CIO is the key connecting point between those realms,” said Ernesto Boada, Interim CIO at Workday. “CIOs need to determine where existing tools can help and where new investments should be made. They need to give finance a data model that is understandable so they can feel comfortable supporting the output.”
The drive for sustainability has also cast a spotlight on the energy efficiency of IT organizations themselves. The U.S. Department of Energy estimates that data centers consume between 10 and 50 times as much energy per square foot as a typical commercial office building. The International Energy Agency calculates that data centers and transmission networks account for up to 1.5% of global electricity use. With the global data center market expected to grow more than 18% annually through 2025, CIOs are being asked to lead the charge in the innovative use of renewable energy sources.
A critical step in successfully executing ESG initiatives is to choose vendors that align with an organization’s sustainability goals. For example, cloud providers can be a major source of Scope 3 emissions, so how those providers source energy should be a part of any cloud evaluation. Some already run fully on renewable energy sources or are committed to doing so within a specific timeframe.
“If you’re going to have a long-term relationship with a vendor, you want to be confident that they will stay up-to-date on requirements and align with your organization’s sustainability goals and values,” said Erik Hansen, Senior Director, Environmental Sustainability at Workday.
IDC found that most organizations now spend up to 25% of their software budget on sustainability-focused software and nearly 60% are already using software that is selected and deployed to directly address sustainability initiatives such as carbon management, environmental compliance, and diversity. “Sustainability can no longer be viewed as just as ‘brand reputation,” Stengel said. “It must be treated as an integral part of the business model.”
Stengel notes that technologies with a specific sustainability-related value proposition are becoming an essential criterion for almost any purchase decision. Hyperscale cloud providers are leading the way in the transition to sustainable energy, and ESG software is a rapidly growing category.
CIOs who embrace ESG initiatives in their organizations have a chance to build new value—and become heroes to executives, employees, and customers.
Learn more about how to help your organization achieve its sustainability and ESG goals.