Recently, there has been a clear trend in considering ESG — Environmental, Social, Governance — as a fundamental part of a company’s business strategy in virtually all industries. Increased attention to environmental issues, social policies, and governance matters is gradually shifting from a fashionable trend to a priority for the development of many enterprises.
McKinsey analysts say that 90% of companies listed on the S&P 500 publish reports on their ESG performance. In the Russell 1000 list, this figure is slightly lower but still impressive at 70%.
In this material, AdvantISS experts aim to delve into the essence of the ESG concept. We will discuss whether this standard of corporate activity is genuinely crucial and explore the technologies that can help optimize the implementation of ESG into the operational processes of enterprises.
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ESG: Essence and Components of the Concept
The term ESG, or Environmental, Social, and Corporate Governance, first emerged in response to growing economic inequality and environmental degradation, discussed by scientists and government officials in some European countries.
Major companies couldn’t ignore this issue, as they faced additional compliance requirements with ESG principles alongside existing operational standards.
ESG, synonymous with sustainable development, represents the standards of a company’s operation, assuming its compliance with three criteria:
- Environmental: The company’s level of concern for the environment. This criterion includes evaluating emissions of harmful substances into the atmosphere, the efficient use of natural resources, and compliance with relevant legislation.
- Social: The company’s relationships with employees, customers, suppliers, and partners. This criterion assesses the safety and health of the staff, working conditions, opportunities for career and personal growth, adherence to human rights, and more.
- Governance: The effectiveness of the company’s management. To meet the requirements, organizational managers must ensure the objectivity of the remuneration paid (including to the leadership) and counteract corruption and any fraudulent schemes.
Lately, sustainable development has attracted attention not only from government bodies, scientists, and business leaders but also from financial institutions, investors, and ordinary consumers:
- ESG lets you assess risks and potential opportunities for stakeholders. Hence, various financial institutions incorporate sustainable development indicators into their advancement strategies.
- Investors take ESG ratings and indices into account when choosing investment targets. They are more likely to invest in assets of companies with positive social and environmental impacts.
- Consumers also show interest in preserving the environment and ensuring social equality, as seen in the choice of products made from eco-friendly materials and high demands for transparency in the activities of companies, along with financial inclusivity.
As a result, companies must comply with ESG standards to attract investment and remain competitive in the marketplace. However, such changes in operations are not just a necessary measure; the movement toward sustainable development brings several business benefits.
Benefits of ESG for Companies
Companies adhering to ESG standards significantly broaden the development prospects of their business. They can expect the following advantages:
- Attracting additional investments: A survey published by Dow Jones shows that 66% of financial leaders consider ESG a priority investment target. They believe that investing in companies committed to sustainable development will ensure long-term growth prospects.
- Increasing consumer loyalty: NielsenIQ reports that sustainable development is important to 69% of consumers worldwide, with over 11% preferring a brand that focuses on eco-friendliness and ESG.
- Improving business performance: A recent IBM report states that 83% of executives are betting on adhering to sustainable development principles to enhance their companies’ performance in the next five years.
- Reducing costs: This becomes possible through reduced energy consumption, efficient resource utilization, and overall operational cost reduction.
- Enhancing brand reputation: Considering that consumers pay attention to companies’ commitment to ESG principles (as mentioned earlier), real achievements in this area can strengthen the brand reputation. For example, Microsoft has significantly improved its metrics, understanding its substantial carbon footprint, and aims to offset all emissions since its founding by 2050.
- Increasing employee satisfaction: This directly affects the quality of work and company revenue. According to an Ernst & Young survey, 61% of respondents (enterprise leaders) pay attention to the health and well-being of employees, 43% value human rights, and 49% emphasize inclusivity.
Despite all the advantages that the implementation of sustainable development standards brings to business, companies face some difficulties. Among them is a lack of technical infrastructure and qualified specialists. Let’s discuss ways to overcome these challenges.
Effective Implementation of ESG Principles in Business Processes
To successfully transition to a new stage of development with ESG principles, a company must:
- Prepare an effective, sustainable development strategy.
- Use innovative digital solutions for process automation, particularly in reporting and decision-making.
Development of a Sustainable Development Strategy
A company that plans to incorporate ESG standards into its operations should:
- Ensure transparency in business processes. At this stage, enterprise management must analyze its functions, operations, and relationships with suppliers and partners. In other words, assess the level of the negative impact of its activities and associated possible risks.
- Develop a plan to reduce the level of negative impact. The next step is to develop initiatives to reduce the company’s impact and potential risks.
- Implement innovative technologies to achieve goals. Progressive digital solutions, especially those based on AI, allow automating the preparation of reports on work done and results obtained, as well as making decision-making precise and well-founded.
- Participate in global ESG programs. In addition to their own development in the direction of sustainable development, each company should participate in the global ESG movement to contribute to environmental preservation and social and economic equality restoration.
For each stage, enterprise management must provide clear commitments built on the SMART model. It is essential that each commitment is Specific, Measurable, Achievable, Relevant, and Time-bound. For example: Company X will reduce its carbon footprint by 30% by 2025.
Digital Solutions Used for Automating ESG Implementation
Software products that automate investment reporting and decision-making are widely used in sustainable development.
Analytical data from the research company Markets and Markets indicates that the market for digital solutions for ESG reporting was valued at $0.7 billion in 2022, demonstrating an average annual growth rate of 15.9%. Its volume is expected to reach $1.5 billion by 2027.
As for the market for products facilitating informed decision-making in the investment sector, its figures are even more impressive. As per Research and Markets, the market size for such digital solutions was estimated at $627.85 million in 2022, with a projected growth to $2,340 million by 2030, demonstrating a CAGR of 18.3%.
Like many other fields, AI is the leading technology shaping digital solutions trends for ESG. The analytical resource Statista forecasts that the AI market will exceed $298 million by the end of 2024, nearly one and a half times the current year’s figures.
Let’s explore the main capabilities of AI-based systems that can optimize the implementation of ESG in your enterprise, including reporting and investments:
- Handling Big Data: AI can gather information from various sources, process it, and analyze it exponentially faster than humans. This capability reduces the time and resources required to work with ESG data.
- Decision-making: Based on historical data, AI-powered predictive analytics enables weighted decision-making. This is an invaluable function of AI-based software, especially when it comes to choosing investment targets.
- Tracking Results: Every company implementing ESG into its business processes must monitor the effectiveness of its actions. AI-powered apps help track changes and patterns in a company’s operations, providing a clearer understanding of its direction.
- Process Transparency: AI-powered virtual assistants give clients and partners 24/7 access to all aspects of a company’s operations that interest them. This enhances trust in the brand, attracting consumers and investors.
- Enhanced Risk Management: The ability to process large datasets, as mentioned earlier, aids in assessing potential risks associated with ESG implementation. AI can not only identify risks but also determine their impact on enterprise revenues and help decide on necessary measures for mitigation.
- Reporting: Companies adopting ESG may face challenges in creating reports on their performance due to their unique structure and reporting rules, as well as the need to identify and assess ESG risks with a large volume of data. AI-based platforms allow for standardized reporting, quickly collecting and processing the necessary data. Thus, the enterprise saves time and resources, and investors gain access to objective, structured information to make investment decisions.
- Monitoring ESG Criteria Compliance: Depending on the industry, companies implementing ESG can use AI-based apps to monitor compliance with environmental, social, or governance criteria. For example, AI-based programs can track carbon footprints or other harmful emissions into the atmosphere and collect feedback from customers or staff. We believe it would be worthwhile to dwell on this issue in more detail and provide examples of software products that well-known global companies use in their ESG initiatives.
Application of AI-powered Software Products for ESG in Global Practices
This global giant, with tens of thousands of stores worldwide, has been using AI-based digital solutions in its marketing campaigns for years to monitor compliance with social criteria. Thanks to AI, the company personalizes its interactions with customers, tracks consumer reactions to social initiatives, ensures seamless service, and achieves other goals important for sustainable development.
This American corporation has also recognized the importance of using AI to support ESG implementation. An example is IBM’s Watson solution, which allows for employee upskilling, analysis of staff feedback, and creating optimal working conditions, thereby increasing the interest and comfort of specialists.
This multinational company leverages software products based on various cutting-edge technologies, including IoT (Industrial Internet of Things), digital twins, and machine learning. Such an innovative approach enables the company to adhere to all ESG principles, including enhancing customer satisfaction, reducing waste, and optimizing energy and water usage in production.
Digital giant Microsoft uses AI-based technologies to reduce carbon emissions. The company has entered into an agreement with the United Nations Framework Convention on Climate Change (UNFCCC), involving the development of an AI-powered platform to facilitate the measurement of emissions and monitor progress in achieving their reduction.
The world’s largest producer of everyday consumer goods incorporates AI-based sorting machines, contributing to zero-waste production. In collaboration with e-commerce leader Alibaba Group, Unilever has launched the “World Without Waste” initiative to increase plastic reuse and reduce plastic packaging by 100,000 tons by 2025.
Are you open for ESG opportunities?
Is your company ready to join the global trend of incorporating ESG into its processes, or perhaps you have already begun implementing this idea? It’s the perfect time to seek the support of a reliable partner who will create an innovative digital product to automate your workflows.
Want to learn more? Contact an AdvantISS manager and receive comprehensive consultation on optimizing your ESG initiatives.