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Economics could curtail sustainability initiatives in 2023

As companies adopt measures to improve sustainability goals, enterprise applications can play a key role. But these efforts must also make economic sense to be successful.

Sustainability became an increasingly visible business trend in 2022, and the momentum promises to continue in the year ahead. However, economic realities could put stumbling blocks in some sustainability improvement efforts.

Companies have pledged to implement sustainability initiatives that foster goals such as reducing carbon emissions, but developing metrics and making those initiatives quantifiable remain works in progress.

ERP vendors are hoping to find a place in that process. Two in particular, SAP and IFS, made steps in providing applications to serve as the backbone for customers' sustainability initiatives. But the success of those initiatives, especially given the economic downturn, and the ability of enterprise application vendors to help facilitate in that success are open questions.

Sustainability hype is justified

Efforts to improve sustainability are both hyped and justified, said Joshua Greenbaum, principal at Enterprise Applications Consulting.

Companies are adopting sustainability goals because the world is moving to regimes where they have to meet requirements to generate energy using non-carbon-based technologies as well as start to decarbonize the atmosphere, he said.

Decarbonization is not only becoming essential for doing business, it's also becoming big business itself, Greenbaum said.

"There are estimates that just the carbon sequestration business alone will exceed the size of the actual energy production business in our lifetimes," he said. "We'll be spending more of the global economy to take carbon out of the air than we will to produce the energy that we need."

All of this will require investment by technology companies to provide tools to improve organizations' ability to track how they use energy and materials in making and distributing products, Greenbaum said.

ERP vendors could play a role in developing tools to backbone sustainability initiatives, he said. ERP data is central to the processes that are crucial for sustainability, and SAP, for example, has made sustainability part of its platform for years.

"SAP is absolutely putting a stake in the ground on this," Greenbaum said. "As a European company, they've been doing this for a while, and they're working with European Union governments on issues like compliance."

Graphic that shows the three pillars of sustainability for organizations: environmental, social and economic.

Sustainability efforts to face economic challenges

However, sustainability initiatives might have a hard time finding their footing in 2023, according to Jon Reed, co-founder of Diginomica, an enterprise computing analysis firm.

"With the economic pressures that companies are facing right now, that feel-good message on sustainability is dead in the water this year," Reed said. "There's too much intense stuff going on in the world for that to hold up. People are talking about it, but they're not going to spend on it."

Companies will be too focused on mission-critical spending, and that likely will not include goals such as sustainability, which can be harder to measure and a less certain ROI, he said. This could change if companies -- and their enterprise applications vendors -- can show how sustainability initiatives save a company money or help a company meet regulatory requirements.

Reed agreed that SAP and IFS have been the most aggressive ERP vendors to provide sustainability-related products. But, he said, these products are a first step; they still have a long way to go in terms of functionality.

Vendors are going to be judged in this space and will be relevant by giving customers day-to-day tools they can use to manage and be more cost-effective.
Jon ReedCo-founder, Diginomica

"It will be interesting to see if they can deliver something that makes a difference in the lives of customers," Reed said. "Because there's no question it's going to be a topic, and it will be less about good keynote platitudes and more about what products they have that can help manage things like energy costs."

The pressure for ERP vendors to provide products that help organizations meet sustainability-related regulations and save on energy costs will continue to ratchet up, he said. However, even SAP is not doing enough to embed these products into customer day-to-day operations.

"Vendors are going to be judged in this space and will be relevant by giving customers day-to-day tools they can use to manage and be more cost-effective," Reed said. "If they do that, they can win on sustainability [next] year. If you don't do that, it's not going to add up to anything."

The circular economy a must for sustainability

One of the problems with advancing sustainability initiatives is that the conversation has been overly focused on carbon emissions rather than the broader and more difficult goal of moving the economy to renewable energy sources such as solar and wind, said Vinnie Mirchandani, founder of Deal Architect, an enterprise applications industry blog.

Moving to renewable energies doesn't make economic sense to most companies while fossil fuels are still plentiful, he said.

"[Many executives] don't say this publicly, because they get attacked, as it's become such an emotional topic, but the reality is that financially, renewables have had a hard time becoming viable," Mirchandani said. "Germany has been trying for 40 years, and they've only gotten to about 40% to 45% of the economy running on wind or solar."

Sustainability efforts will likely be more successful if they focus on areas such as the circular economy, where products are designed, produced and distributed with the goal of staying in use as long as possible and being reconstituted at their end of life, he said. For example, the chemical company Eastman has introduced a technology called molecular recycling that reuses plastics at the molecular level, which avoids the traditional recycling process of heating and reformulating it.

Start in your own house

The issues around sustainability are complex, but for many companies, the most obvious place to begin sustainability initiatives is with carbon generation in their operations. The first step is for them to decarbonize their manufacturing and supply chains, according to Michael Lotfy, senior vice president of power products and systems at global electric systems provider Schneider Electric.

Lotfy presented at the recent COP27 climate change conference, where he said companies around the world have committed to sustainability goals, but only 8% have taken action to reach those goals.

He called on organizations to start with their own companies first, such as making offices more energy-efficient and using sustainable materials, then working with suppliers and customers to help reduce their carbon emissions.

Schneider, for example, is using less copper and aluminum to produce its new FlexSet switchboards, he said, and ships the product with reduced and reusable packaging materials, which alone saves about a million tons of carbon dioxide. Schneider is also working to help its top-tier suppliers in North America decarbonize their operations by using an independent subsidiary to explain what their baseline carbon dioxide emissions are and what actions they can take to reduce them, he said.

Schneider's sustainability initiatives are being driven from the company's top executive levels, which is crucial for success, Lotfy said.

"This comes from the top down -- it's a culture within the company," he said.

Data will become one of the pillars that support companies in their sustainability initiatives in 2023, according to Patrick McCarthy, chief revenue officer at Precisely, which provides data management services and products and is based in Burlington, Mass.

Precisely works with customers to integrate data from enterprise applications and storage systems, including SAP, ServiceNow, AWS, Azure, Cloudera and Snowflake, and enrich it with data from other sources such as demographic or geographic applications to meet reporting requirements.

Environmental, social and governance (ESG) reporting needs are real for companies and are being driven by top-level executives and boards, who are looking for detailed and accurate data on targets such as the types and amounts of materials used in packaging.

"They're looking for granular levels of detail that support their ESG reporting and standards," McCarthy said.

The most useful data will come from the manufacturing and distributing of products, he said. This means designing in recyclability as well as understanding the carbon footprint of components and the modes of transportation used by suppliers.

Ultimately, regulations and compliance will put pressure on organizations to operate more sustainably, but not right away, according to Mirchandani. Every bureaucracy is developing its own rules, so there's no set of standard metrics, and many organizations will balk at being told what to do without having an economic incentive.

"Companies have to find ways to see money from this, then it will become a lot more real," he said. "Sustainability has to move from compliance to having much more business value, and it has to be multifaceted. It cannot just be focused on the renewables and nice conversations about the big impact."

Jim O'Donnell is a senior news writer who covers ERP and other enterprise applications for TechTarget Editorial.

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