For anyone who missed this 2022 memo: Conscious consumerism is in. Companies that aren't getting the message will be left in the dust by those that do.
From the boardroom to the shopping cart, a wide array of stakeholders are looking to environmental, social and governance (ESG) criteria to help decide where to put their dollars. Sustainability, in particular, has come under the microscope in the last year as a result of the exponentially growing focus on climate change. CIOs and other leaders would do well to understand ESG and sustainability trends for business and take proactive action to get ahead of the competition.
Sustainability and ESG here to stay
The world is going through a rapid pace of change in how we think about and address sustainability and other socially conscious investing areas, said Simon Mingay, research vice president at Gartner. Businesses are rising to address these needs differently -- sometimes by demonstrating leadership for others to follow and, in other cases, simply by keeping up with new regulations and industry norms.
CIOs have an important role in the growing concern for sustainability and other social conscious issues.
"We live in a more technology-enabled and technology-dependent world than ever before, leaving CIOs with a great opportunity and an enormous responsibility," said Jahidul Khandaker, senior vice president and CIO of Western Digital, a U.S. computer hard disk drive manufacturer and data storage company, headquartered in San Jose, Calif. "CIOs must balance ... new [market] demands with how we respond to critical issues facing the world today, especially around the environment."
Being proactive in these areas is critical.
Simon MingayResearch vice president, Gartner
"Every enterprise is on the pathway to net-zero whether they have decided this for themselves at this point or not," Mingay said. "The only choice they have left is whether they want to lead, follow or get drawn in kicking and screaming."
Regardless of how companies choose to engage, CIOs will have different roles, depending on those initiatives, Mingay said. Those roles can range from supporting leaders in other departments with the right information to taking on a more direct role in managing sustainability transformation, much like other digital transformation projects.
To that point, here are 10 ESG and sustainability trends for business CIOs need to understand.
1. Sustainability impact measurement
Many organizations are just starting on a sustainability journey, which includes first steps such as defining terms within the context of the particular business and beginning to measure sustainability impacts.
A growing number of enterprises are undertaking a materiality assessment that inventories the most significant impacts and concerns the company needs to address, Mingay said. Top sustainability categories to examine include greenhouse gas emissions and energy.
Sustainability is a component of a company's broader ESG efforts, and mapping all potential ESG issues onto a quadrant to help prioritize initiatives based on level of impact and level of importance is important, Mingay said. What's noted in the top right quadrant would reflect problems with the most significant impact and the scrutiny, while those in the lower left are least impactful and scrutinized for an industry. For example, waste disposal would be a much bigger issue for a mining company than a call center. In contrast, the call center may be more concerned with its IT power usage, which would be a much smaller consideration for a mine.
"[Mapping ESG and sustainability priorities] is fundamentally important because this is your crucial governance artifact where you need to focus," Mingay said.
The materiality assessment can help the CIO identify which data they need to capture and integrate into various analytics workflows, he said. It also gives them a basic understanding to guide conversations across the organization to determine the best way IT can contribute and get involved, such as using IoT for energy efficiency.
2. Greenhouse Gas Protocol frameworks
Scientists across the globe agree the world has a climate emergency that demands immediate attention. Researching common standards and frameworks is an important step in taking the right action.
CIOs also need to familiarize themselves with the impact of the Greenhouse Gas Protocol, which standardizes how enterprises report and manage greenhouse gas emissions, Mingay said. Learning the basics of what scope 1, 2 and 3 emissions mean is a first step.
What are Scope 1, 2 and 3 emissions?
The Greenhouse Gas Protocol provides categories of greenhouse gas emissions that technology and business leaders should understand. These categories are Scope 1 emissions, Scope 2 emissions and Scope 3 emissions:
- Scope 1 emissions characterize direct emissions from the assets a company owns or controls, including factories, heating and vehicles.
- Scope 2 emissions are indirect greenhouse gas emissions -- those released into the atmosphere -- from the electricity, heat, cooling and steam a company buys.
- Scope 3 emissions, which are likely the majority of emissions a reporting company generates, include indirect emissions not covered by Scope 2. Scope 3 emissions are generated throughout the value chain from upstream sources -- such as raw materials mining and refining -- and downstream sources -- such as distribution, product power efficiency and end-of-life emissions from recycling or disposal.
"If a CIO does not understand the specifics of the enterprise's goals and targets across all three Scopes and the timeline [required to address them], then they're going to be floundering around addressing things that aren't important right here, right now, or [they won't give] sufficient attention to those things that are important," Mingay said.
3. Circular economy
From consumers to software vendors, an increasing number of stakeholders are interested in the extension of the product lifecycle via a circular economy.
CIOs and other leaders need to explore how to incorporate a circular economy, such as ways to innovate product design, Mingay said. In particular, CIOs need to pay more attention to the end-of-life aspects in how they build IT systems.
Historically, most CIOs could stage broken products out of view until sending them off for disposal. But new regulations are affecting how companies manage that.
"You have to go back and start looking at strategy, architecture and vendor choices in terms of the end-of-life disposal process," Mingay said.
CIOs will need to develop ways to measure what percentage of e-waste is reused, recycled or disposed, Mingay said. They also need to balance security issues such as shredding media against sustainability.
4. Climate adaptation
Going greener is critical to climate change mitigation, but some leaders are augmenting that focus with climate change adaptation as well. Whereas climate change mitigation focuses on prevention and reduction, climate change adaptation focuses on alterations that accommodate the current and future effects of climate change. For example, mitigation seeks to lessen the degree to which the Earth's atmosphere continues to heat and the impacts on weather and food security, while adaptation seeks to accommodate the effects of climate change now and in the future. Initiatives in Miami that are working to raise street levels are examples of the latter.
Businesses will increasingly address climate adaptation as part of their risk mitigation strategy, Mingay said. Climate adaptation requires exploring all the different ways that climate change may disrupt operations, supply chains and existing customers and how business and IT leaders will deal with that.
"Underlying risk models are changing under [business and IT leaders'] feet," Mingay said.
CIOs may need to collaborate with other teams to develop a more agile risk modeling process. They also need to streamline how these tie into their business continuity plans, disaster recovery plans and resilience models, Mingay said. This requires more frequent and detailed conversations with critical providers, cloud providers and supply chain partners to identify new risks and plan strategies to communicate and address them.
5. Supply chain sustainability
Creating a more sustainable supply chain will be a critical initiative for most companies -- and a complex and difficult challenge.
Increasingly, CIOs will be called upon to connect the data gaps to help achieve sustainability goals across the supply chain, Western Digital's Khandaker said. These efforts often need to combine data from a company's ERP and logistic applications with third-party data gleaned from CDP [formerly, Carbon Disclosure Program] reporting tools.
During the pandemic, Khandaker's team worked on building the IT infrastructure to facilitate supply chain consolidation, analyze freight lines and optimize routing to reduce costs and carbon footprint. They approached the project with three main goals in mind: ship finished goods more efficiently, proactively predict logistics challenges and improve on-time performance. His team built an internal logistics app that combined data integration, data quality, AI tools and direct integration into existing logistics apps.
For example, incoming data would sometimes vary from what Khandaker's team expected. So they developed an anomaly detection engine to detect problems and tools to automatically correct data when possible or alert the appropriate teams when that wasn't. This ensured their system could operate with reasonable accuracy.
His team also developed machine learning algorithms to identify when lead times changed and then propagated these changes to appropriate planning tools. They also developed other tools for characterizing differences in freight lanes, which reflected different transport providers, modalities or routes to optimize costs and reduce the number of shipments. Shipment consolidation is an important goal with many nuances. For example, it may be more effective to ship parts of an order early to consolidate with another order to the same customer or a nearby customer.
Khandaker's work provides a snapshot into just how complex improving supply chain sustainability is.
6. More honest carbon footprint disclosure
One dilemma facing companies is how and what to disclose about their carbon footprint and other ESG metrics. On the one hand, some business and IT leaders may want to paint a rosier picture by minimizing their reported impact. That's a mistake.
Emerging frameworks for greenhouse gases are asking companies to be thorough in capturing the full extent of their emissions, said Rita Soni, principal analyst at Everest Group, a global research firm, headquartered in Dallas.
"The pledges are based on reducing your carbon footprint rather than the absolute numbers," Soni said.
It is also essential to think about how companies can present these results across various indicators and audiences, she said. While Scope 1 emissions may be more tradeable on carbon exchanges, making meaningful changes on other Scopes could also help improve relationships with regulators, investors, employees and citizens.
Some of the largest banks are starting to explore how they can channel indirect investments out from more carbon-intensive industries toward industries that are actively reducing emissions, Soni said. And some of the Everest Group's enterprise clients are asking how they can improve communication with employees around sustainability metrics and support them in taking a more active role in sustainability programs within the company.
Similar frameworks for other ESG measures may likewise reward progress rather than punish companies for their current impact.
7. Green IT
IT structures and services that prioritize environmental sustainability are becoming more important as part of the larger climate action movement.
CIOs will need to focus on creating greener IT options, Mingay said. That's particularly true in tech-heavy industries such as banking, finance and telecommunications, where IT investment has an outsized impact on the company's carbon footprint.
Government action is also giving this area a push.
More CIOs will need to prioritize greener IT in the wake of the U.S. Energy Act of 2020, which raised power usage effectiveness requirements, said Vidisha Suman, a partner in the digital transformation practice of Kearney, a global management consultancy, headquartered in Chicago. Some of the top objects of these programs include migrating to more sustainable energy solutions, better tracking and more automated energy-specific controls. Many companies are working to consolidate data centers and migrate to the cloud. Others are investing in autoscaling workloads to minimize their energy footprint. And AI ops are helping to improve HVAC systems to reduce power consumption.
8. Impact sourcing
Sustainability is a critical aspect of a company's ESG efforts, but it's not the only one. Addressing workplace bias and creating better diversity, equity and inclusion strategies has become a critical focus for many organizations. Few companies can truthfully claimed to have addressed inequality, however, and most organizations need to work even harder to give fair opportunities to all. One ESG trend that CIOs and other business leaders should understand in this area is impact sourcing, which prioritizes giving business to organizations that focus on employing marginalized and disadvantaged populations.
The Everest Group has seen a substantial uptick in clients asking for impact sourcing, Soni said. These efforts build on more widely known programs that balance gender and racial diversity to include people who have a disability and other populations that might face challenges in the traditional hiring process. In this case, the HR team needs to work with CIOs to set up a program to measure what they want to support. For example, they may have a goal that 50% of new hires come from pools of people with only a community college degree or lack a credit score. These programs also need to include training and support programs to give people the appropriate jumpstart to succeed on the job.
The pandemic shed a light on health inequities. Impact sourcing is one way to address that.
Another kind of impact sourcing is exploring how to include a more diverse population in clinical trials, Soni said. Traditionally, companies conducted clinical trials in centralized locations, limiting the racial and ethnic mix of participants. New decentralized clinical trial programs can recruit participants from many places at less cost. More important, the program can also increases the validity of results across a more extensive range of people.
9. Responsible AI
As more companies turn to AI to automate processes, the degree to which algorithms can do harm is growing -- and quickly. Regulators and consumers are increasingly calling for responsible and transparent AI. Many of the recent advances in AI are built on black-box algorithms that deliver impressive results. But it's not always clear how and when they break or when they might amplify existing biases.
Now is the time for CIOs to operationalize their IT infrastructure to support meaningful AI ethics goals, said Sanjay Srivastava, chief digital officer at Genpact, a global professional services firm, headquartered in New York.
"Think about the holistic process instead of just the AI piece," Srivastava said.
Designing an AI framework that addresses the whole is critical, not just isolated parts, he said. For example, if you think about applying AI in the accounts payable process, a narrow focus will only consider reading dollar amounts on incoming invoices. A more holistic focus would consider getting timely responses and zero accounts payable errors.
It is also essential to set guardrails around where companies can apply AI, he said. CIOs also need to think about explainability for the decision process rather than just the decision itself.
For example, when Srivastava's team is doing financial risk analysis on a lending portfolio, they build the ability to click to understand why the AI model gave a specific recommendation. Sometimes the answer is hidden in the footnote of a financial report.
"By providing the ability to click to see that footnote, we help the decision-maker be more confident about the AI model's prediction," he said.
10. Better ESG analytics
The question of what data companies should capture for various types of ESG reporting is an emerging area.
The data challenge is significant because ESG-related data is often fragmented within the organization, and external data needs to be procured and co-mingled with internal data sets, said Vinod Prashad, managing director of digital and analytics at global consulting firm SSA & Company, headquartered in New York.
Vinod PrashadManaging director of digital and analytics, SSA & Company
"There's limited historical organization experience with ESG KPIs and that in turn calls for a rigorous methodology to determine the right KPIs, identify underlying data sources and perform the necessary data transformations to calculate relevant metrics," Prashad said.
Stakeholders of all types are focused on sustainability and all the other aspects of ESG so staying abreast of developments is key.
Eventually, all the major enterprise applications will likely support the most common ESG analytics, said Bob Hirth, a senior managing director at Protiviti, an IT and management consultancy. But in the meantime, CIOs will need to integrate a patchwork of tools to meet their ESG goals. The current applications often require enhancements or modifications to facilitate automated ESG reporting. This may also involve changes or improvements to current ERP systems.
Security goals pertaining to ESG-related information is critical as well.
"Enterprises should improve data security and privacy controls to meet certain ESG disclosures," Hirth said. "They need to be prepared for disclosure of data breaches in accordance with Sustainability Accounting Standards Board standards for specific industries."
Urgency, despite complexity
If ever the statement "if it's not one thing, it's another" felt relevant, it's today. The problems facing CIOs and other leaders truly seem never-ending. And yet, despite that complexity, leaders can't ignore the need for action. And they need to do so in a thoughtful and balanced manner.
Undoubtedly, IT teams will turn to technology in an effort to tackle sustainability and other ESG concerns. However, it's critical to remember that these have their own issues. For example, training AI demands a lot of energy. Blockchain, which many will look to for supply chain help, also requires vast amounts of energy. On the diversity front, although DEI technology can help power a good program, none will take the place of a strategic and cultural focus.
Still, helpful frameworks and advice are coming to the fore. And with a major dose of social justice and climate hope, leaders can act and make real progress.
About the author
George Lawton is a journalist based in London with over 30 years of experience writing about computers, communications, knowledge management, business and health.