Why Tech Companies Need to Consider ESG:Risk management has evolved over the years. While risk conventionally manifests through operations, regulatory developments, and market conditions, new risks emerge from ESG demands. In recent years, there have been global calls for companies to pay more attention to their environmental and societal impact. More importantly, many companies have reported facing significant risks due to environmental occurrences like climate change. These trends have increased the need for companies to integrate measures to cater to ESG.This article discusses ESG within the context of the tech industry. It also highlights why tech companies need to consider ESG more than ever.
What is ESG?Environmental, social, and governance (ESG) are the factors through which a company’s sustainable impact and ethical practices are measured. ESG metrics are also used to estimate how well a company navigates environmental, social and governance risks.
ESG in the Tech Industry
- The tech industry has paid more attention to ESG in recent years. A recent KPMG survey found that most tech CEOs view climate change as the greatest risk to their company’s growth. However, while top company officials are more aware of the need for ESG, its integration has remained minimal in the tech industry. However, the need for tech companies to integrate ESG practices has become more urgent due to the following reasons:
- Investor Considerations: Now more than ever, investors are considering ESG performance before channelling their funds into companies. Investors are more specifically interested in monitoring ESG reports and assessing companies’ ESG risk exposure. These details are used to determine investment decisions and prospects for future financial performance. Essentially, tech companies seeking to attract investors in this current climate need to proritise ESG.
- Demands of Consumers: Consumers are increasingly conscious of companies’ environmental and societal impacts. These factors greatly influence consumers’ decision to patronise a company or utilise its products. For instance, a recent Verdict survey found that consumers prefer to patronise businesses that take noticeable ESG actions. More so, companies indifferent about their practices’ social or environmental impacts run the risk of reputational damage. Thus, in this current age of increased ESG awareness among consumers, tech companies seeking to retain a sizeable market share need to take their ESG practices seriously.
- Financial Performance: ESG-conscious companies generally perform better than companies without an ESG framework. For instance, a 2020 McKinsey survey found that companies with solid ESG have a 10% lower cost of capital than companies with weak ESG performance. Since ESG risks are lower in these companies, borrowers tend to view such companies as less risky. A 2022 study also found that companies with high ESG performance generally deliver better risk-adjusted returns.
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