The Roland Berger Telco ESG Index

By Michael Knott, Gary Taylor, Arnoud van der Slot and Floor van Werven

Environmental, social and governance (ESG) regimes have become an increasingly important tool for measuring and improving sustainability within the business world. The telecom sector is no different given its large carbon footprint and historically poor gender diversity, amongst other ESG issues.

In this research, Roland Berger indexes major telcos across Europe and North America to see how both the sector as a whole and individual firms are performing against critical ESG metrics. We identify the areas where most improvement is required, and some of the successful strategies and approaches adopted by leaders in ESG.

Why is ESG increasingly important to telcos?

In a world grappling with the challenges of the climate crisis, sustainable models for doing business are more important than ever. Environmental, social and governance (ESG) reporting regimes have emerged as a critical lever for businesses to track, improve and demonstrate their sustainability performance, with ESG key performance indicators (KPIs) often linked back to formal incentive structures, including executive compensation.

The emergence of ESG in the telecom sector has in many ways been driven by global and pan-sectoral forces. ESG regulatory regimes have clearly strengthened in recent years, with a plethora of international and national schemes emerging. Initiatives such as the Global Reporting Initiative (GRI) and the Task Force on Climate-Related Financial Disclosures (TCFD) have seen many major telco players reporting ESG performance on a voluntary basis for well over a decade, and mandates are now increasingly also coming into force. Significant recent developments include the March 2024 US Securities and Exchange Commission (SEC) ruling that requires public companies to disclose investment critical ESG information, and the Jan 2023 introduction of the EU Corporate Sustainability Reporting Directive (CSRD). CSRD mandates networks to disclose their contributions to the circular economy with unprecedented levels of detail, and the EU expects stakeholders to scrutinise this new data as closely as financial information.

With scrutiny will come financial pressure to improve ESG performance from a variety of stakeholders: government, investors and of course end-consumers, who increasingly vote with their wallets when it comes to sustainability.

Alongside the clear direction of travel in terms of reporting mandates and associated stakeholder pressure, ESG is of particular importance to telcos due to their high energy consumption. Telecom networks consume ~2% of national energy in a typical developed country with ubiquitous fixed line coverage, with many telcos also operating highly energy-intensive data centres. The traditional dominance of men within the industry is another principal ESG consideration; diversity is a core social consideration within ESG KPI sets.

Roland Berger’s Telco ESG Index

1. Index methodology

Given the clear and growing importance of ESG issues to telcos , Roland Berger has benchmarked key telcos within Europe and North America to create its telco ESG index. This provides a perspective on current ESG performance across major players and differs from traditional rating agency benchmarks by capturing industry-relevant ESG performance KPIs. 28 screened telcos provided publicly available information across these metrics in each category (E, S and G), and were therefore included within the index. For comparability, metrics were then normalised against the revenue and employee headcount of each business to adjust for differences in ESG impact that result purely from the scale of an operation (e.g., larger telcos naturally emitting more greenhouse gases). While telcos are largely comparable in nature, differences in their operations, markets, and business models remain, and these should be considered when interpreting the scoring.

2. Industry-aggregate results

At an industry-aggregate level, the results of the index show that telcos perform strongest on environmental metrics, and weakest on social. → Figure B

Viewed geographically, there is no clear geographical relationship between the ESG score and the location. In general, the ESG score seems to decline with a higher ESG per capita. → Figure C

3. Telco-level results

The top performing telcos in the index overall were KPN, Deutsche Telekom and Vodafone. → Figure D

The telcos reviewed as part of the index vary significantly in turnover, in accordance with the varying size of the economies served within their respective home geographies. Whilst overall scores and constituent metrics were normalised for size (taking revenue and employee headcount as proxies), it is interesting to note that the poorest performing telcos within the index are still mostly smaller companies.

However, the inverse is not true: the largest players are not necessarily top performers, with AT&T and Verizon notable underperformers, largely due to their outsized greenhouse gas emissions. This illustrates that whilst lack of scale may represent a barrier to investing sufficient resources in ESG, economies of scale within larger telcos do not necessarily lead to better ESG performance, with organisational culture, local regulation and the agenda of top management likely also playing pivotal roles. → Figure E

What are the key drivers of telco ESG performance?

1. Environment

In a world where the impact of climate change is evident in our day-to-day lives, the impact of business on the environment is unsurprisingly front and centre within the ESG agenda. Telcos have a critical role to play here, with the 28 indexed firms contributing ~14 MT CO2e in scope 1 and 2 emissions alone in 2023. The biggest contributor to this is use of electricity to operate core telco infrastructure and equipment. Decarbonization here will primarily come through decommissioning legacy networks as full fibre deployment reaches maturity.

Swisscom is a top environmental performer within the RB index with an 80% reduction in direct emissions since 1990, with a further 10% on 2023 levels to be achieved by 2025. Since 2010, Swisscom has used entirely renewable energy, some of which comes from 100 self-operated solar PV plants. The group is now focused on electrifying its mobility fleet to continue driving down direct emissions, alongside the installation of heat pumps and heat recovery systems within its Exchanges and data centres.

Another top performer on the index is KPN, the largest Dutch operator. This strong ranking has been achieved with a 52% reduction in scope 1 and 2 emissions since 2010 and 100% of electricity requirements being met through renewable or low-emitting sources resulting in zero market-based emissions. KPN has additionally collected 90% of old KPN equipment for reuse and recycling.

2. Social

Social ESG metrics ensure telcos are behaving responsibly towards a variety of stakeholders, particularly by providing a supportive environment for their employees. Most telcos report on gender diversity and demonstrate a poor representation of women in the sector. Employee turnover is notably high, and training provision weak; this in part reflects ongoing layoffs in the sector to maintain EBITDA in the face of declining real Revenue.

Top social performer Telekom Austria (A1) has achieved 40% female representation within the workforce, in part through a market leading training offering. Its digital education programme also provides education throughout local communities, supporting the digital upskilling of society at large.

3. Governance

Board-level gender diversity is strong across the indexed telcos, and reflective of the reasonable levels of gender diversity across the firms at large. Top performers Telekom Slovenia, COLT and KPN have a female board representation of >50%.

The future of ESG in telecom

Government regulation, and pressure from consumers, employees and investors all demand improved ESG performance, and the telco sector must continue to adapt and improve from its current solid baseline.

On environment, telcos can go further and faster on decarbonisation of their electricity supply, the most significant contributor to their scope 1 and 2 greenhouse gas emissions profile. Entry into power purchase agreements (PPAs) with renewables developers can provide telcos with stable, fixed price renewable energy, and this is now common practice.

Looking ahead, some telco are delivering 30% reductions in energy consumption by stepping up decommissioning of the legacy copper network. Inevitably, this also reduces Opex significantly, leading to a ‘decom-decarb double’ with ROI of 30% or more.

Telcos could also become co-investors in renewable generation schemes, as seen by pioneers such as Swisscom, which operates its own solar PV farms. Additionally, whilst scope 3 emissions did not form part of our index, tackling these will become increasingly critical. Scope 3 emissions typically constitute between half and two-thirds of total GHG emissions within the indexed group of telcos, and as such, the telco supply chain will have a critical role in the continued decarbonisation of the sector.

On social development, telcos must continue to develop a gender-balanced workforce in what is a traditionally male-dominated sector, although the results of our index are encouraging on this front. Employee turnover remains a challenge, and telcos must invest in an attractive personal development package for their employees, whilst promoting community engagement through outreach programmes adopted by the likes of Telekom Austria (A1).

On governance, telecoms appear well-positioned for the future, with well-aligned incentive systems, and widespread adoption of international reporting practices. This will stand the industry in good stead as the current predominance of voluntary reporting schemes is replaced by government regulatory mandates, for example with the recent introduction of the Corporate Sustainability Reporting Directive (CSRD) in the EU.

The overall benefits for telcos of investing in ESG are clear, with consumers increasingly demanding strong sustainability credentials, and governments placing an onus on businesses to invest in improved ESG performance. Telcos must grasp the opportunities available to build on their significant progress to-date, moving forwards towards a more sustainable future.