ESG and digital Transformation go together like a horse and carriage

The survey said….companies that are successful in their digital transformation are almost twice as likely to see ESG as a “key focus of their digital initiates.”

In short, companies that are good at digital transformation tend to be more focused on ESG.

This begs the question, why? 

BCG suggests that companies that have successfully engaged in digital transformation are more focused on innovation. To cite BCG: “Their new capabilities can help tackle broader opportunities in the company agenda.”

Disruptive technology

Some liken ESG to disruptive technology. The narrative runs like this:

The need for it is growing fast; those that adopt it gain a first-mover advantage. They can create or mould an ESG friendly ecosystem, a supply chain that supports environmental and social policy and has good governance. Those who don’t will be left behind, playing catch-up, which they may ultimately fail to achieve, leaving them struggling for relevance.

You could apply that above paragraph to disruptive technology or ESG. In the context of the above, the two terms are interchangeable.

And digital transformation is partly about creating an agile environment, one that can rapidly make changes and constantly looks to innovate. So digital transformation is vital for companies wishing to avoid great gales of disruption and embrace them instead.

Is it any wonder that ESG and digital transformation seem so inextricably linked?

The E, the S and the G

BCG also found that whether an organisation focuses on the E, the S or the G in ESG partly depends on the company’s nature. But then, this conclusion is hardly surprising.

It found, for example, that people-centric companies, such as firms operating in healthcare or consumer services tend to focus more on the social aspect of ESG. On the other hand, energy companies or firms operating in industrial goods tend to focus on environmental and financial institutions on governance.

Technology ecosystem advantage

BCG has also coined the phrase technology eco-advantages to describe how some companies apply technology to advance sustainability.

BCG says:

• Digital transformation can enable companies to focus on growth whilst sustainability can support cost reduction and growth.
• Digital transformation helps gather and analyse data, and that data can support sustainability initiatives, for example, the supply chain.
• Digital tools support decision making including in the complex area of sustainability.
• Digital transformation helps companies identify and react to risks.

Real-world examples 

Will oil eventually become a stranded asset? There are roughly $150 trillion of proven oil reserves, but one shudders to imagine the implications for the climate if all those hundreds of billions of oil barrels were either used as fuel or plastics.

It is clear: oil reserves might be valuable, but it is unlikely we will ever tap into more than a small percentage of what’s left. Peak oil supply may never be reached, although peak oil demand might be close. A good chunk of those $150 trillion barrels of oil might eventually become stranded assets.

The Ukraine crisis will almost certainly accelerate this movement.

For oil companies, this is a problem.

How do they respond?

Do they accept the inevitable and just milk the oil resource for as long as possible, using the proceeds to fund dividends?

Do they try to adjust? If so, might they leave it too late? 

One company that managed the transition superbly is Orsted, once an energy company called Dong Energy, heavily reliant on coal, now a wind farm company and the world’s number one off-shore wind farm operator.

As this report from McKinsey points out, at one point, the company feared that the switch to renewables could bankrupt the company. Today it is valued at around €42 billion.

How did it manage the transformation?

It partly achieved this by forging partnerships and creating an ecosystem.

The company says: “Our business transformation is a story of technological innovation, steep learning curves and difficult strategic choices that have led to long-term gains.”

Yara International

BCG cites the example of Norwegian crop-nutrition company Yara International. The company has been around since 1905, engaged in comprehensive transformation, and in the process, has become a company which enables farmers to maximise yield and quality while minimising environmental impact. Although, for example, it is a producer of fertiliser today, it supports farmers with digital tools.

Another example is agriculture equipment manufacturer John Deere, a company that has engaged in significant digital transformation and prioritises ESG. It has the eighth-lowest ESG score among 510 companies in its sector, according to Sustainalytics. The company gives an example of how digital transformation and ESG support each other by referencing data and cotton production. It says that it is” providing technology, best-in-class equipment, and data tools that enable the sustainable outcomes growers and their customers desire.”

To borrow words from a song by Frank Sinatra. ESG and digital transformation:

”They go together like a horse and carriage.”