Cory Searcy is Professor and Vice Provost and Dean of the Yeates School of Graduate Studies at Toronto Metropolitan University. Muhammad Asif is an Associate Professor of Management Science at Plymouth State University.
In the United States, it is easy to find prominent politicians condemning corporations for using ESG to impose what they call a radical leftist ideological agenda on Americans. Recently, some state governments have gone beyond rhetoric to explicitly limit ESG-based investments.
Although often politically motivated, these criticisms have arisen from the fact that ESG (environmental, social and governance) criteria have no agreed performance standard, which can lead to questionable decisions in rankings, measures and ESG reports. ESG disclosure does not eliminate honest mistakes or even blatant instances of corporate fraud. It can also suffer from poor quality, outdated and unaudited data. These limitations can seriously undermine the role of ESG in improving transparency and accountability, and expose it to partisan political attacks that sometimes ring true.
However, while serious, the limitations of applying ESG factors can be overcome. As our research has shown, emerging technologies such as blockchain, digital twins, satellite imagery and cloud computing, to name a few examples, can play a critical role in measuring and reporting on climate change. ‘ESG. Many of these technologies are already in use and there is room for new applications.
The blockchain – a decentralized and unalterable digital ledger – offers countless possibilities to improve ESG disclosure. Fishcoin, for example, uses blockchain to encourage 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 ESG implementation.
Blockchain progress has been so rapid that regulators are still trying to catch up. Recently, the US-EU Joint Technology Trade Council began working on tracking and reducing carbon emissions using blockchain and other technologies. The British Standards Institution (BSI) also recognizes blockchain-based carbon 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 industries. Applications vary, but digital twins can enable and be used to streamline supply chains, optimize networks and respond to disruptions. A growing number of organizations believe that digital twins can catalyze transformation and help them realize their sustainability agendas.
Satellite imagery offers a number of useful applications for 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 trouble spots for issues such as poor working conditions. Additionally, AI-assisted satellites can synthesize environmental data and convert it into environmental information.
Cloud computing and analytics are also important ESG tools, particularly for their potential to automate data collection, standardize data, report metrics, and enable greater transparency within and across organizations. A PwC survey of Fortune 1000 companies found that most C-suite leaders are committed to using the cloud for ESG: 60% use it or plan to use it to increase ESG reporting, while that 59% use or plan to use the cloud to refine their ESG strategies.
Emerging technologies can be used independently or as part of a more integrated platform. But they won’t solve all ESG problems. Blockchain, for example, can be used to encode poor quality data. Satellite imagery can identify hotspots of poor working conditions, but it may require field verification. Data privacy and security risks remain paramount, as evidenced by numerous high-profile breaches. This is just the beginning of a long list of potential technological limitations.
As part of a larger effort, however, technology can improve ESG measurement and reporting. It can improve the availability of high-quality, up-to-date and verified ESG data. This can provide a much-needed basis for improving transparency and accountability. There is no technical solution for all ESG issues – judgment is always needed in deciding what to measure and disclose – but technology can help reduce or eliminate some of its obvious shortcomings.
The growing attention to ESG challenges practitioners, academics and policy makers to recognize its shortcomings and develop innovative solutions to address them. ESG focuses on big issues, but has yet to realize its potential. Emerging technologies can help it achieve this.
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