How new technologies can strengthen ESG
Cory Searcy is Professor and Vice-Provost and Dean of the Yeates School of Graduate Studies at Toronto Metropolitan University. Muhammad Asif is Associate Professor of Management Science at Plymouth State University.
In the US, it is easy to find prominent politicians who condemn business for using ESG to impose what they call a radical left-wing ideological agenda on Americans. Recently, some government authorities have gone beyond the rhetoric to explicitly limit ESG-based investments.
Although often politically motivated, this criticism has arisen from the fact that ESG (environmental, social and governance) criteria do not have an agreed performance standard, which can lead to debatable decisions in ESG rankings, measurement and reporting. ESG disclosure does not eliminate honest mistakes or even serious cases of corporate fraud. It can also suffer from low quality, outdated and unaudited data. These limitations can seriously undermine ESG’s role in improving transparency and accountability, and leave it open to partisan attacks that sometimes ring true.
Although serious, the limitations of using ESG factors can be overcome. As our research has shown, emerging technologies such as blockchain, digital twins, satellite imagery and cloud computing, to name a few examples, can play a critical role in measuring and reporting ESG. Many of these technologies are already in use, and there is room for new applications.
Blockchain – a decentralized, immutable digital ledger – offers countless opportunities to improve ESG disclosure. Fishcoin, for example, uses blockchain to encourage data sharing and improve traceability in the seafood industry. Repsol, a Spanish energy company, uses blockchain to improve product certification in its supply chain. Blockchain has also been widely used to support financial transactions, trading of emission certificates and contract management, which are some of the foundations of ESG implementation.
Advances in blockchain have been so rapid that regulators are still trying to catch up. Recently, the US-EU Joint Technology Trade Council began working on tracking and mitigating carbon emissions using blockchain and other technologies. The British Standards Institution (BSI) also recognizes blockchain-based tracking of carbon emissions.
Digital twins are a virtual representation of physical objects or processes in the real world and are already being used in agriculture, mining and other sectors. Applications vary, but digital twins can enable and can be used to streamline supply chains, optimize networks and respond to disruptions. A rapidly growing number of organizations believe that digital twins can catalyze transformation and help them achieve their sustainability agendas.
Satellite imaging offers a number of useful applications for ESG. Satellites already measure biodiversity, changes in water reservoir levels, water quality, air quality and land use. They can even be used to identify hotspots in the supply chain for problems such as poor working conditions. Also, AI-assisted satellites can synthesize environmental data and convert it into environmental insights.
Cloud computing and analytics are also important ESG tools, particularly for their potential to automate data collection, standardize data, report metrics and enable greater transparency within and between organizations. A PwC survey of Fortune 1000 companies found that most C-suite executives are committed to using the cloud for ESG: 60% either use or plan to use it to expand ESG reporting, while 59% use or plan to use the cloud to refine their ESG strategies.
New technologies can be used independently or as part of a more integrated platform. But they will not solve all of ESG’s problems. For example, blockchain can be used to codify poor quality data. Satellite imagery can identify hotspots for poor working conditions, but this may require on-the-ground verification. Risks to privacy and data security remain important, as evidenced by many high-profile breaches. This is just the start of a long list of potential technological limitations.
However, as part of a broader effort, technology can improve ESG measurement and reporting. It can improve the availability of high-quality, up-to-date, verified ESG data. This can provide a much-needed basis for increased transparency and accountability. There is no technical solution to all ESG issues – judgment is still required to decide what to measure and disclose – but technology can help reduce or eliminate some of its clear shortcomings.
The growing attention to ESG challenges practitioners, academics and decision-makers to recognize the flaws and develop innovative solutions to address them. ESG focuses on big issues but has yet to fulfill its potential. New technologies can help it get there.
