Digital Technology is at the heart of ESG transformation

Digital Technology

Whilst green and climate technology continues to mature, Digital Technologies are core to almost all public and private sector organisations in the Middle East. Digital technology is defined as electronic tools, devices, systems, and resources that generate, store, or process data. There are many examples of how digital technologies can be applied to support environmental issues including the use of Robotics, Internet of Things (IoT) and Drones to improve efficiency, reduce waste and provide less carbon-intensive means of environmental management. 

ESG frameworks help organisations to apply a broader approach to sustainability and can highlight the potential risks in the application of these technologies. For example, while the use of Robotics can help tackle environmental issues, it can also result in potential social impacts such as job displacement. 

At an organisational level, this highlights the importance of taking a strategic approach to how it utilises digital technology to support the ESG agenda. The following are key examples across each ESG domain. 

Environmental

The application of this pillar of ESG encourages organisations to consider the environmental impact of their activities. As Digital Technology plays a central role in many organisation’s operations and activities, there are many opportunities to consider how to enhance the use of this technology and leverage it to enable broader opportunities to improve environmental impact.  

Value chain

The ‘Circular Economy’ is a model which aims to reduce waste from the production and consumption of goods and services. This includes consideration of all elements of the value chain including raw materials, processing, transport, retailing goods and services, consumers, waste, and recycling. Organisations can also apply the Circular Economy model to how it uses digital technology: 

• Sustainability metrics can be applied to the sourcing processes, for example, carbon footprint should be considered as part of the selection criteria when considering a Cloud provider. 
• The natural tensions between functional and economic imperatives and environmental consequences can be considered as part of the design process. 
• Sustainable methods, such as Green Coding standards, can be used throughout development. 
• The carbon footprint of using technology can be reduced through the application of efficient operations such as the use of intelligent server load balancing. 
• Electronic waste can be processed sustainably to remove and recycle materials, conserve landfill and prevent environmental pollution. There are many electronic waste services available in the Middle East. 

Enablement

It is also important that the Technology functions of an organisation enable the wider organisation to reduce waste in their supply chains through Digital Technology. This can be achieved through establishing communication channels to explore opportunities with departments and functions, driving research and development, exploring technology partnerships, and ultimately supporting POC (Proof of Concept) and roll out of initiatives. A key part of this enablement is delivering education and awareness which can help stimulate innovation around sustainable technology. 

Social

The ESG framework extends sustainability beyond environmental issues and highlights social considerations. Digital Technology is increasingly impactful on society, impacting people’s lives in multiple ways including the way that we learn, think, and communicate. Organisations need to consider the social impact of how they build and use Digital Technology. 

These considerations will range depending on several factors such as the extent and maturity of Digital Technologies in use across an organisation. The following are key areas that require focus. 

Responsible technology

Artificial Intelligence (AI) is a prominent example of nascent and disruptive technology that presents a number of social impact risks. These include bias and discrimination, lack of accountability, reduced human-to-human interaction, and job displacement. These risks, along with those associated with other nascent technologies such as those associated with the Metaverse and Digital Assets, require further examination and the need to build appropriate mitigating controls. For organisations that are also in the business of building and releasing these technologies, the potential social impact is far greater. The challenge is also compounded by the relative immaturity of regulations to provide guidance. 

Data Privacy 

Data Privacy is an area where organisations benefit from guiding frameworks, standards, and laws in many Middle Eastern jurisdictions including KSA, UAE, Bahrain, Qatar, and Egypt where Data Protection Personal Data Protection Laws have been established. Many of these are not prescriptive around the specific technology measures and therefore organisations should make judgements to ensure that appropriate technical controls are in place. Regardless of the specific regulations, it has become commonly accepted that all organisations have a responsibility to their employees and customers with regard to safeguarding their Personal Identifiable Information. Failure to do so not only results in potential regulatory implications but also puts an organisation’s reputation at risk.  It is, therefore, vitally important that organisations put in place the right control environment to ensure that they are responsible with individual’s and an organisation's data and digital assets. 

Employee Well-being 

Organisations can leverage Digital Technology to improve the well-being of their employees through the enablement of Well-being initiatives such as providing technical solutions to support flexible working policies and providing tools to improve communication, collaboration, and efficiency. Training and awareness schemes can be delivered to improve the impact of the organisation’s technology on users. 

Community 

The ‘S’ in ESG includes considering the community in which an organisation operates. Technology training and awareness can be extended to all related stakeholders including customers and the wider community through charitable training programmes. Charitable electronic waste management schemes are also growing in popularity and provide a way to improve social impact while also managing environmental impact. 

Governance

While it is evolving, Corporate Governance generally predates the adoption of environmental and social issues as corporate priorities so some of the key elements of the ‘G’ may already exist for many organisations. Digital Technology already plays a key role in improving the effectiveness of Corporate Governance which is, in turn, key to the realisation of the ‘E’ and the ‘S’. 

Digital Technology plays a role in enabling some of the key ‘G’ factors listed by the World Economic Forum Global Future Council on Transparency and Anti-Corruption. Some key examples are summarised below:

Corporate Leadership

Decision-making, Empowerment of compliance function 

- The control environment and business systems to deliver accurate insight and analytics to enable better-informed decision-making.

- Enablement and enforcement of compliance activities through Governance Risk and Compliance (GRC) tools. 

Risk and Crisis Management

Preparedness and Mitigation, Regulatory compliance, Segregation of Duties, Information Governance, Cyber Security

- Business systems to enable and enhance risk management, crisis preparedness, business continuity and enforce mitigating controls and governance. 

- The control environment and supporting tool sets to mitigate Cyber security risks and secure data and assets. 

Anti-corruption and Integrity

Record-keeping, Financial Controls, Reporting and Accounting, Training and Communications, 

-  The control environment and Business systems and tools that deliver accounting and reporting functionality and controls to support accurate and transparent financial and operational reporting. 

- The enablement and enhancement of training and communication through Digital Technology.

Supply/Value Chain Management

ESG Integration, Transparency

- The control environment, data platforms, transactional systems, and reporting to enable ESG integration and transparency. 

Technology Governance and Responsibility

Effective Technology Governance is a key prerequisite for any technology function to enable the broader organisation effectively. This provides the foundations to effectively manage IT risks and align activities with the organisational objectives, including those relating to ESG. Technology Governance is also important for establishing the right control environment which promotes the responsible use of Digital Technology and related activities. As explored as part of the Social considerations, it is important to control the potential social impact of technology, particularly when it comes to nascent and disruptive technologies where the potential impacts are less obvious or easy to understand. This challenge is compounded by how Corporate IT landscapes are evolving. Increasingly organisations operate a mixture of owned and third-party digital technologies. This creates uncertainty about the boundaries of responsibility. Organisations must employ the appropriate governance and control structures to ensure the right level of oversight and responsibility.

ESG Reporting

ESG reporting is concerned with the ability to provide stakeholders such as investors, customers, or regulators with a transparent disclosure of data relating to its ESG activities and performance. There are regulations and reporting frameworks across multiple jurisdictions, such as the Climate Related Financial Disclosures (CRFD) in the UK, Non-Financial Reporting Directive (NFRD) in the EU and other territories including Malaysia, New Zealand, and Canada. While there are currently no mandatory reporting requirements in the United States, an SEC proposal has been made for ESG-focused funds and advisors. The majority of these requirements apply to financial institutions and large or listed companies, they can impact smaller organisations in their supply chains.  As requirements evolve, it is expected that small and medium-sized companies will increasingly come into scope for ESG-related disclosures. 

In the Middle East, there are already ESG reporting requirements in place. Companies listed in the UAE (on the Abu Dhabi Securities Exchange (ADX) or the Dubai Financial Market (DFM)) are required to publish a sustainability report and the Saudi Exchange has issued ESG disclosure guidance. Along with the broader ESG momentum, it is expected that these requirements will continue to evolve and expand, particularly in light of regional targets and as regulation continues to be welcomed. 

Meeting ESG reporting requirements can be a significant challenge. BlackRock surveyed investors with US$25 trillion of assets and said just over half (53%) of global respondents said they were concerned about “poor quality or availability of ESG data and analytics”. This challenge exists because producing highly available, quality data is difficult and requires time, persistence, and investment. As ESG reporting is relatively nascent and requirements continue to evolve, the complexity is elevated. 

Multiple solutions

There is rarely a single technology solution that meets all of the ESG needs but rather an integrated ecosystem is required, particularly in complex organisations. Reporting requirements, such as those relating to Net Zero, demand a number of different solution capabilities, which all need to be integrated and work in harmony to be effective. 

The source data required for ESG reporting, such as those relating to human capital, cyber security, greenhouse gas emissions, and safety will typically be produced and processed by multiple financial and transactional systems. This includes ERP (Enterprise Resource Planning), GRC (Governance, Risk, and Compliance), Environmental, Health, and Safety (EHS) and Greenhouse Gas Management systems. Not all of the data required will be produced and processed by an organisation’s legacy systems and there may be a requirement for these to be reconfigured or customised, for new integrations to be built, or for new solutions to be introduced into the ecosystem. There is also a need to integrate these systems with the appropriate analytics and reporting solutions to provide the ESG metrics and reporting. It is therefore critical that the right application, data, and technical architecture are established to enable ESG reporting. This should also be supported by an appropriate governance and control environment to protect the availability, consistency, integrity, and security of the organisation’s ESG data. 

Business alignment

As with all technology-enabled transformations, alignment with the business architecture is also fundamental. The systems and data challenges cannot be met by the technology function alone. Success will require significant collaboration with stakeholders across the organisation. For example, ESG data requirements may result in the need to make changes to business processes and data owners across the organisation will be responsible for sets of ESG data. This introduces many of the challenges typically faced in traditional business system transformations including change management and cultural obstacles. This is why it is important that the ESG reporting endeavour is established and driven from the top and alignment begins at the strategic level. 

In summary, the ESG reporting challenge can be significant and requires a transformation driven by people, process, and technology. The scale of the challenge will be different for each organisation depending on the requirements, ambition, and strategy of the organisation. It is therefore recommended that all organisations integrate the Digital Technology transformation considerations when setting the organisation’s ESG Strategy. 

Digital Technology is at the heart of ESG transformation

To conclude, there is an exciting opportunity to apply ESG frameworks in a way that takes an organisation’s approach beyond a box-ticking and compliance exercise to being transformational, improving across all elements of its triple bottom line - social, environmental, and economic. 

Regardless of size and ambition, Digital Technology is at the heart of an ESG transformation, particularly in the enablement of ESG reporting. It must be central to an organisation’s ESG journey from strategy through to execution. 

A 2022 PwC report found that 60% of respondents said they had a formal ESG strategy in place, but further questioning showed this may be an overly optimistic claim. This indicates that many organisations are still in the early stages of developing ESG strategies and have an opportunity to fully integrate Digital Technology. 

For those who haven’t, it is a timely opportunity for leaders in an organisation to initiate action around ESG and the role of Digital Technology.