While many see the Environmental, Social, and Governance (ESG) trend as a recent fad, history counsels otherwise. For as long as we’ve had communities and institutions, societies have often questioned the impacts of an activity on all stakeholders. From Babylonian regulation of irrigation to the many prohibitions against usury, humans have often insisted that a commercial activity does good, not just does well.

More recently, large investors like university endowments and sovereign wealth funds have begun to codify these standards into formal investment criteria. This 21st century movement, beginning with Socially Responsible Investing (SRI) and “green” mutual funds, has blossomed into a segment that’s forecasted to reach $40T in assets under management in the next six years. Studies have shown that companies that engage in corporate environmental responsibility (reflecting the ‘E’ subset of ESG) have a lower cost of capital than those that do not¹. It turns out, it actually pays to do good!

What is ESG?

So what is ESG – and, more importantly, how can organizations identify, measure, and improve on these factors? ESG is a principle that prioritizes environmental, social, and governance issues in investment decisions.

Today, investors who focus on ESG often look for companies backed by strong governance that positively affect or minimize harm to the environment and communities in which they operate. In reality, this can be difficult to determine; the largest hurdle to assessing ESG metrics is that the underlying characteristics are inherently qualitative, so it’s difficult to measure and compare across industries and jurisdictions.

Standardization Efforts

At Davos 2020, the World Economic Forum announced a collaboration to establish standardized methods for measuring certain ESG metrics. This effort culminated in the publication of a set of metrics and disclosures that are categorized into one of four pillars (though they should be viewed as interdependent, not isolated categories): principles of governance, planet, people, and prosperity. The goal of the publication of these metrics is to better effectuate consistent reporting; for investors, these standards allow a better “apples-to-apples” comparison between companies.

One important driver of standardization is the risk that management teams “greenwash” or window-dress their activities. For example, companies might market that they exclusively utilize sustainable supply chains, but fail to sufficiently audit their vendors. Failure to follow through with stated practices can open companies up to sanctions by the FTC or SEC.

A Board-Level Priority

Understanding and championing ESG initiatives is an important role for a company’s board of directors (the ‘G’ on its own is a huge part of the board’s purview!). Many ESG factors represent significant risks and opportunities for organizations; they can drive innovation, but can also result in regulatory hurdles. The board’s development and communication of an ESG strategy can be a central part of investors’ decision whether or not to invest in the company.

ESG in Tech and AI

For tech companies, especially those working with AI, ESG considerations present unique challenges and opportunities:

1. Environmental: While tech companies might not be heavy industrial polluters in the way manufacturing companies are, they still have significant environmental impacts. Data centers consume huge amounts of water and energy, and the environmental cost of hardware production and the subsequent impact of disposal is substantial.

2. Social: We’ve all experienced firsthand just how much influence tech companies exert over society through their products and platforms. Issues like data privacy, algorithmic bias, content moderation, and the labor impact from AI are at the forefront of social considerations. For companies developing AI solutions, ensuring ethical AI development and deployment is paramount (and this is one of the reasons I founded my nonprofit - the ALEA Institute).

3. Governance: Strong governance is crucial in the fast-paced tech world. This includes cybersecurity measures, responsible data management, transparent AI decision-making processes, and diverse and inclusive leadership.

Looking Ahead

As we navigate the complex intersection of technology, AI, and ESG, it’s clear that these considerations will only grow in importance. The upcoming posts in the ESG series will cover how Environmental, Social, and Governance factors each specifically impact tech and AI companies, and how board members can guide their organizations towards sustainable, responsible, and profitable futures.