Cory Searcy is a professor and the vice-provost and dean of the Yeates School of Graduate Studies at Toronto Metropolitan University. Muhammad Asif is an associate professor of management sciences at Plymouth State University.
In the United States, it’s easy to find prominent politicians condemning business for using ESG to impose what they call a radical left-wing ideological agenda on Americans. Recently, some state governments have moved beyond rhetoric to explicitly limit ESG-based investing.
While often politically motivated, these criticisms have arisen from the fact that ESG (environmental, social and governance) criteria do not have an agreed-upon performance standard, which can lead to debatable decisions in ESG rankings, measurement and reporting. ESG disclosure does not eliminate honest mistakes or even egregious cases of corporate fraud. It can also suffer from low-quality, out-of-date and unaudited data. These limitations can severely undermine ESG’s role in improving transparency and accountability, and leave it exposed to partisan political attacks that sometimes ring true.
While serious, however, the limitations in applying ESG factors can be overcome. As our research has shown, emerging technologies such as blockchain, digital twins, satellite imaging and cloud computing, to name but a few examples, can play a critical role in measuring and reporting on ESG. Many of these technologies are already being used, and there is room for new applications.
Blockchain – a decentralized, unalterable digital ledger – offers countless possibilities for improving ESG disclosure. Fishcoin, for example, uses blockchain to incentivize data sharing and improve traceability in the seafood industry. Repsol, a Spanish energy company, uses blockchain to improve product certification in its supply chain. Blockchain has also been widely used to support financial transactions, emissions certificate trading and contract management, which are some of the foundations of implementing ESG.
Advances in blockchain have been so rapid that regulators are still trying to catch up. Recently, the US-EU joint technology trade council began working on tracking and curbing carbon emissions with the help of blockchain and other technologies. The British Standards Institution (BSI) also recognizes blockchain-based carbon emissions tracking.
Digital twins are a virtual representation of real-world physical objects or processes, and they are already being used in agriculture, mining and other sectors. Applications vary, but digital twins can enable and can be used to streamline supply chains, optimize networks and respond to disruptions. A rapidly growing number of organizations believe that digital twins can catalyze transformation and help them achieve their sustainability agendas.
Satellite imaging offers a number of useful applications to ESG. Satellites already measure biodiversity, changes in water reservoir levels, water quality, air quality and land use. They can even be used to identify supply chain hotspots for issues such as poor working conditions. Moreover, AI-assisted satellites can synthesize environmental data and convert it into environmental insights.
Cloud computing and analytics are also important ESG tools, particularly for their potential in automating data collection, standardizing data, reporting metrics and enabling greater transparency within and between organizations. A PwC survey of Fortune 1000 companies found that most C-suite leaders are committed to using the cloud for ESG. 60% are either using or planning to use it to augment ESG reporting, while 59% use or plan to use the cloud to refine their ESG strategies.
Emerging technologies can be used independently or as a part of a more integrated platform. But, they won’t solve all of ESG’s problems. Blockchain, for example, can be used to codify poor-quality data. Satellite imaging can identify hotspots for poor working conditions, but it may require on-the-ground verification. Risks to privacy and data security remain paramount, as many high-profile breaches attest. This is just the beginning of a long list of potential technological limitations.
As a part of a broader effort, however, technology can improve ESG measurement and reporting. It can improve the availability of high-quality, up-to-date, verified ESG data. This can provide a much-needed basis for improved transparency and accountability. There is no technical fix for all ESG issues – judgment is still required in deciding what to measure and disclose – but technology can help reduce or eliminate some of its clear shortcomings.
The increasing attention on ESG challenges practitioners, academics and policymakers to recognize its flaws and develop innovative solutions to address them. ESG focuses on big issues, but it has not yet fulfilled its potential. Emerging technologies can help it get there.