Why ESG is good business in an increasingly digitised world

We are living in a time of rapid digitisation, radiating across all industries in all kinds of organisations and for all kinds of tasks. Lockdowns and social distancing have prompted questions about how best to design our cities, our buildings and our children’s education. As individuals, we have become more aware of the fundamental interconnectivity of the world we live in.

Every day, across our screens, we are harshly reminded that our actions have consequences, that we have a shared responsibility for our wider communities, and that life doesn’t come with the prospect of a do-over.

In turn, the pandemic appeared to heighten public awareness of wider social issues. The voices of social activists and workers’ rights campaigners were amplified, while acknowledgement of the climate crisis and the necessity of action became inescapable. And the nascent movement towards a more stakeholder-centric view of business shifted up several gears.

It’s no surprise that this same period has seen Environmental, Social and Governance (ESG) come of age as an idea that is redefining expectations of business’s relationship with and responsibility to the societies in which it operates.

When it comes to ESG, the technology sector has a mixed reputation. On the plus side, digitisation is frequently viewed as the tool for other industries to accomplish their own sustainability goals. When utilised wisely, technology provides unrivalled benefits to a wide range of people, radically altering business models and even societies, advancing a wide range of social good.

However, technology also poses new dangers to privacy and security, as well as new societal issues such as screen addiction, and necessitates ethical arguments around the power of artificial intelligence, freedom of speech and democratic participation. To sustain a healthy society, these challenges must be acknowledged, debated and addressed.

Businesses are now proactively and positively contributing to a wide range of pressing issues, from climate and sustainability to boardroom and workplace diversity and equality.

There are plenty of indications that this is more than a social-media-led flash in the pan. Perhaps the most convincing piece of evidence as to the significance of ESG to the corporate sphere is that investors are starting to recognise and respond to it. According to MorningStar, sustainable equity funds were outperforming traditional equity funds at the end of 2020, while the amount invested in ESG funds has more than doubled in the past year. ESG funds captured $51.1 billion of net new money from investors in 2020 – up from $21 billion in 2019. 

The combination of regulation, investor action, NGO pressure, company culture and consumer expectations is a potent mix. The focus has shifted firmly to enterprises, which now have an exceptional opportunity to set the standard for doing ‘well’ at the same time as doing ‘good’.

But there is still that nagging question as to whether are we, in effect, simply entering a new age of corporate and social responsibility – CSR 2.0. In short, yes, but there is a risk that superficial symbols will be confused for genuine action.

That isn’t to say that the ESG phenomenon should be dismissed out of hand. Whereas CSR was largely driven by marketing departments, ESG is ingrained in all of an organisation’s actions and decisions – and it begins at the top. The transition to become more genuinely responsible corporate citizens affects and involves the entire business. It is interwoven into the company’s strategy and decision-making: which is why nearly half of FTSE 100 companies’ executive pay is now directly linked to ESG targets.

In the end, CSR fell from favour because it didn’t deliver authentic change; it was the proverbial tick-box exercise. ESG is significantly more than that. It demands action and transparency, often involving deep, systemic change within and between organisations.

Another significant distinction is that CSR was frequently an afterthought to the main business objective of turning a profit. It was not really thought of as a key factor in the way that profits are made. Rather than performing the bare minimum, a successful ESG strategy is about establishing and maintaining trust with all stakeholders.

And it is good business. Companies that embrace ESG are already thought to be more robust to market shocks, and many have outperformed their competitors throughout the pandemic. The dangers of losing investment, reputation, customers, employees and business opportunities have all increased as a result of not embracing ESG.

The way businesses interact with their global communities is no longer merely a footnote in annual reports, or a topic of discussion at investor relations meetings. It is a method of conducting business. And companies are taking it on because it is the right thing to do, not simply because it is good for the bottom line.

Joe Baguley is CTO, EMEA, at VMware.