ESG Reporting Is Now a Competitive Differentiator for Technology Firms

Gordon Tucker, Managing Director Global Leader, Technology, Media and Telecommunications Industry Practice
Bob Hirth, Senior Managing Director Member of the PCAOB Standards and Emerging Issues Advisory Group (SEIAG)

Historically, the technology industry has been all about speed, innovation and growth. The winning firms have been those that could rapidly invent and develop new products and services and bring them to market faster than their competitors.

But the formula for success in technology is changing. Now, great tech firms must not only be disruptive and first to market, they must be socially responsible as well.

To be a responsible technology firm is to manage the organization in a more balanced way, with an increased focus on good governance and responsibility to the larger community, including socially responsible business and environmental practices.

There are several compelling reasons for adopting this approach. First, it is becoming a competitive imperative, as several industry leaders have made a serious commitment to corporate responsibility and sustainability. For instance, several major firms are publicly engaged on the issues of climate change and economic inequality. Microsoft operates as a carbon neutral business, and Google is now powering 100 percent of its operations with renewable energy. Cisco, through the Cisco Foundation, makes social investments to help people overcome poverty and inequality. Alibaba supports numerous charitable and socially responsible programs, including a RMB10 billion program to combat poverty in China.

These companies have also recognized that environmental, social and governance (ESG) reporting is important to their long-term success, and like 85 percent of S&P 500 companies, they report annually on ESG performance, believing that this is now a corporate best practice.

Second, government scrutiny is intensifying, with policymakers examining issues that are vitally important to technology, such as data privacy and diversity. For instance, regulators are weighing rules that would safeguard an individual’s personal data online, modeled after the General Data Protection Regulation enacted in the European Union. To address diversity, California recently passed a law requiring publicly traded companies in the state to have at least one woman on their corporate board of directors.

Third, stakeholder expectations are changing.  Customers want to know they are purchasing products and services from companies that share their values. Investors not only want to incorporate ESG data into their decision-making, they now expect to have that information.

Social responsibility is extremely important to employees as well. Tech workers today will not hesitate to petition their own management with concerns about a range of issues. Last year, Amazon employees mounted protests over a tool the company has marketed to U.S. law enforcement. In response to an employee petition, Salesforce announced that it is creating a new role, that of a chief ethical and humane use officer, whose job will be “to develop a strategic framework for the ethical and humane use of technology across Salesforce.” 

Fortunately, it’s getting easier to operate as a responsible technology firm. New industry-specific sustainability accounting standards from the Sustainability Accounting Standards Board (SASB) can help tech firms to be more transparent about business practices that impact the environment and society. The standards, created for 77 industries, including technology, provide guidance on what information should be reported to investors, and how. These standards reflect six years of study and market consultation by SASB and are designed to include only the “likely to be material” sustainability disclosures of interest to investors.

Glass Lewis, an influential corporate governance services provider, has agreed to integrate the SASB’s guidance into the research reports it provides to its 1,300 investor clients. This will give investors another tool for evaluating the sustainability of the companies they are investing in, and it will help make the standards more widely available.

Getting Started With ESG Reporting: Issues to Consider

It’s important for technology firms to understand that ESG issues are also business issues that can drive financial return. Tech companies should consider the following issues in particular:

  • First, firms should ensure that they have a strong corporate governance operation. In the responsible technology company, governance is about balancing innovation and growth with the need to manage risk, compliance and social responsibility issues.
  • Second, they should pay close attention to corporate culture, which often can be intense and dominated by a singular vision. Leadership support for ESG must be carried out consistently throughout the organization. Words need to match actions.
  • Third, companies should be prepared for increased government scrutiny and regulation in such areas as privacy and cyber security.
  • Finally, companies will also need to consider the level of board risk oversight that may be required for ESG reporting and identify the process and internal controls for ESG data, including how that information will be verified for accuracy.

Beneficial Outcomes

Technology companies that take a proactive approach to ESG reporting can expect to achieve several valuable business benefits.

They can make progress on diversity. This is not just a matter of equity; it is an urgent business issue in an industry where companies have a constant and growing need for talent, and sustainable growth may not be achievable without improvements on the diversity front.

They can improve efficiency by using ESG reporting and managing to specific targets to reduce waste and operating costs. It can be a powerful strategic lever and spur innovation.

Finally, companies can use ESG reporting as a valuable opportunity to inform the marketplace about the good things the business is doing for the environment and society. It can help attract and retain much-needed talent while enhancing the company’s brand image and reputation. In this way, the company’s “non-financial” activities add measurable value to the enterprise. 

Read more posts on The Protiviti View related to ESG reporting.

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