SANTA CLARA, Calif.—According to some environmental, social, and governance (ESG) experts, the push toward ESG resembles what someone once said about the weather: Everyone talks about it, but no one does anything about it.
OK, an exaggeration, granted. But a major theme of the recent TiEcon 2024 conference in Santa Clara, Calif., was that, when it comes to ESG, we are in a “low-progress era.” Very few are willing to invest in meaningful ways to achieve their ESG ambitions, experts at the conference said.
And when you factor in the meteoric rise of generative AI (Gen AI), the experts are worried. Why? Because its training and operation require significant computing power, translating into a massive energy footprint. This raises questions about the sustainability of widespread Gen AI adoption if not coupled with advancements in energy-efficient computing technologies.
Because of this, ESG was a major theme of TiEcon 2024. TiE is the largest global nonprofit organization focused on fostering entrepreneurship across different stages.
First, some ESG background: The roots of the movement can be traced back to the 1960s with the rise of environmental awareness and social responsibility movements.
The 2000s witnessed a surge in socially responsible investing, and the 2006 launch of the Principles for Responsible Investment by the United Nations further solidified the integration of ESG factors into mainstream investment practices.
Today, ESG has transcended a niche concern and become a strategic business imperative. Investors, consumers, and regulators are demanding greater transparency and accountability from companies regarding their environmental impact, social practices, and governance structures.
The Three Pillars of ESG
ESG is a multifaceted concept encompassing three interconnected pillars:
- Environmental: This focuses on a company’s impact on the natural world. Key considerations include climate change mitigation, resource use (energy, water), pollution reduction, and waste management.
- Social: This pillar examines a company’s relationships with its stakeholders, including employees, customers, and communities. Labor practices, diversity, equity, and inclusion (DEI), human rights, and community engagement fall under this category.
- Governance: This dimension assesses a company’s internal structures and processes. It includes aspects such as board composition, executive compensation, transparency, risk management, and ethical conduct.
As pressures have mounted, many companies have started to acknowledge that these factors will affect their businesses, and they have to address their resiliency against these risks. Over time, many companies have acknowledged this, and now, more importantly, they’re making pledges about how they’re going to address these risks and achieve their ESG ambitions.
But the question has become: Are these pledges just PR statements, or are they true aspirations backed up with concrete actions?
There are many roadblocks when it comes to meeting ambitious ESG pledges. One is a lack of standardization. The absence of a universally accepted ESG reporting framework creates confusion and inconsistency. This makes it difficult to compare the ESG performance of organizations objectively and hinders effective benchmarking.
Another issue is short-termism. Publicly traded companies often face pressure to prioritize short-term profits over long-term sustainability. Investors focused on quarterly earnings reports may be less receptive to ESG initiatives that may not yield immediate financial returns.
Geopolitical tensions are also a roadblock. The ongoing war in Ukraine and its impact on global energy markets have forced some countries to prioritize energy security over climate goals. This could lead to backsliding on ESG commitments in the short term.
“Unicorns and Rainbows”
Another problem is so-called “greenwashing.” Some companies engage in this practice, making unsubstantiated or misleading claims about their ESG progress.
At the conference, Joydeep Ganguly, SVP of Gilead Sciences and a global climate leader, relayed how things are going at his company. He started with a challenge:
“My hope is not to leave you inspired,” Ganguly said. “My hope is to actually leave you a little bit pissed off, a little bit upset for the fact the we are basically creating a world where we are more worried about today than tomorrow. And I hope that if nothing else, you all leave with a notion that, tomorrow, ESG is not a social activism agenda, it is fundamental to how we will survive as a civilization. And if that pissed-off nature leads to action, job well done.”
He related stories from the trenches. Too often, he’ll get a report on the ESG progress that Gilead Sciences is making—and be rather underwhelmed. He studied one recent report and said, “This is all anecdotes. This is all unicorns and rainbows. I want numbers.”
Then, when he got the numbers, the ESG program had actually gone backwards by 1/66th percent—and that was the best of the recent progress reports (or lack-of-progress reports, you might say).
Elizabeth Elroy, VP of EHS and Sustainability for Micron, discussed what her company is doing around metrics, KPIs, and ESG pledges. And what more must be done. It was a common theme at the conference. Elroy said:
“Micron has made public commitments regarding net zero, public commitments around water recycling, waste recycling, all of that. And those are outstanding public commitments. But what is so much more important is … not just how do we drive improvements of our existing operations around the world, but how do we shift left from a research and development perspective so that we’re developing new products [even more sustainably]. We have to do that with the mindset of, ‘we have to use less energy, less water, fewer chemicals, produce less waste,’ because all of the fantastic things that we’re doing with our existing operations quickly are undone if we’re not driving change through technology development.”
Climate Anxiety
Kyra Lanza, AVP, ESG Strategy & Engagement at Merck, discussed how it is important for companies to involve their employees as they strive to meet their ESG pledges.
“Climate change can be very overwhelming for people,” she said. “A lot of people have climate anxiety. So, when you can make it consumable and simple, it really starts to drive the conversation into more strategic things we can do as a business.”
Involving employees has a broad reach, Lanza said. “With every type of engagement, from webinars to employee service, embedding it throughout the core of your business with things that you were already doing, it not only shows that you are great corporate citizens, it’s including everyone, and it’s also tackling a lot of problems, because historically excluded communities are the most impacted by climate change.”
Wendy Rentschler, Head of Corporate Social Responsibility for BMC Software, said more investment in cutting-edge technology is needed to help companies meet their ESG pledges. “Pandora’s box has been opened, and generative AI is here to stay,” she said. “And it is only going to use more and more power. Natural resources are finite resources, and the technology in the world like kinetic energy and wind and solar are out there. They just require investment.”
Navigating the ESG Maze: Potential Solutions
Despite the existing challenges, there are ways to foster a more impactful ESG landscape:
- Long-term investment focus: Encouraging a shift in investor mindset toward long-term value creation, where ESG performance is recognized as a driver of sustainable growth, is crucial.
- Standardization and transparency: Collaborative efforts by regulatory bodies, industry leaders, and investor groups to develop a standardized ESG reporting framework are essential for ensuring transparency and comparability. Collaboration was a big theme of TiEcon 2024. “We should not care who achieves net-zero first,” Gilead Science’s Ganguly said. “The planet won’t care who achieves net-zero last, and we shouldn’t either.”
- Accountability and enforcement: Stronger regulatory frameworks with clear ESG disclosure requirements and robust enforcement mechanisms can help deter greenwashing and hold companies accountable for their ESG commitments.
- Technological innovation: Investing in research and development of energy-efficient computing technologies specifically designed for Gen AI applications is vital to mitigate their environmental impact. Additionally, exploring renewable energy sources to power these systems may significantly reduce their carbon footprint.
- Consumer power: Consumers have a significant role to play by making informed choices and supporting companies that demonstrate genuine commitment to ESG principles.
Ultimately, ESG is not a passing fad, as the experts at TiEcon stressed. It should be looked at as a fundamental shift in how businesses operate.
By Tom Dunlap, Research Director, Avasant