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Head of Technology Banking at Bank of the West / BNP Paribasoverseeing the provision of financial services to US technology companies.
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As an industry known for “thinking differently” and innovating our future, tech has long been a leader in corporate America’s embrace of sustainability. But the time has come for the industry to more deeply integrate environmental, social and governance (ESG) principles into its operations. Why; Two reasons:
ESG is at a critical inflection point due to the rapidly evolving regulatory landscape of 2022, the significant shift to remote and hybrid work, and the maturation of sustainable finance.
And after two decades in the industry, I am convinced that there are great opportunities for technology companies willing to take advantage of the industry’s leadership.
Here are three ideas:
1. Support strong standards, reports and regulations.
ESG capital inflows reached milestone heights in 2021 (registration required), with high-rated stocks posting record gains. Even in the context of the broad market downturn of 2022, funds have handle volatility better than their non-ESG counterparts. With ESG assets predicted to make up more than a third of it global assets under management by 2025, it is clear beyond any doubt that the interest for ESG investing is here to stay.
Why is this important to the technology industry?
Many of the biggest names in tech earn strong ESG ratings from investor research and rating firms because of the low carbon footprint of providing software and cloud services. While ESG challenges remain—especially for hardware companies facing tough decisions about labor production and material sourcing— The technology sector of the S&P 500 is the largest allocation in many popular ESG equity funds.
But with popularity comes scrutiny – from shareholders, rating agencies and regulators. And the current lack of standardization around reporting prevents investors from making apples-to-apples comparisons. It also invites wishful thinking (sometimes called greenwashing) from fund managers who make exaggerated ESG claims.
On February, Morningstar removed ESG tags (paywall) of over 1,000 European funds with over $1 trillion in investments over concerns that they did not meet appropriate ESG standards. In the US, the SEC has proposed tighter rules for funds who wants to use the ESG label.
The SEC has also moved to create climate disclosure rules that require more robust reporting of climate risks by companies. It was a positive sign when an alliance of tech companies including Alphabet, Amazon, eBay, Facebook and Salesforce signed a 2021 letter to the SEC supporting consistent climate reporting requirements.
However, now that draft rules have been released, some businesses criticized the SEC’s proposal as weight. Tech company leaders have an opportunity to take the other side. Their strong support for regulations will strengthen investor confidence in ESG—and in their own companies.
2. Bring new sets of solutions to the problem of lack of diversity.
As the focus on the “S” of ESG sharpens, corporate sustainability leaders are embracing diversity and inclusion reporting. Diversity is essential for growth and innovation, especially in the midst of the war for talent.
Black workers hold only 7% of jobs in the US tech industry, according to a recent survey. In leadership, 83.3% of US tech executives were white and only 32% of managers were women.
Beyond ESG pressures, tech companies should consider that a lack of diversity increases the risk of groupthink. When decisions and creativity are constrained by homogeneity, it affects innovation and growth. Groupthink blinds you to the needs of a diverse user base. This is a problem if your business model is to dream up breakthrough innovations that will be widely adopted.
A diverse workforce is key to solving some of the industry’s toughest problems, such as bias in AIgrowing and more sophisticated cyber threats and development an anti-racist conversion.
I am given two chances:
• The shift to remote work due to the pandemic has made it more viable to recruit talent outside of the big tech hubs. There are untapped pockets of tech talent across the country with a density of Black, Latinx, and female STEM graduates. Remote work could also do tech roles more sustainable for women.
• Strong support for ESG policy initiatives could help. The industry has recently made progress in disclosing diversity data. Tech leaders should also support board diversity laws and board diversity disclosure rules that provide investors with greater transparency into companies’ progress. Recently defeated a California requirement that state-based companies Having at least one female board member is disappointing, but that shouldn’t stop the industry from supporting other approaches to workforce diversity policy.
3. Leverage sustainable financing tools.
Despite the tech industry’s positive reputation for sustainability, only 26% of tech companies have significant integrated ESG into their strategic planning, according to a recent CEO survey. There are now powerful financial instruments that the industry can adopt or work to change the status quo.
An example: Sustainability Linked Loans (SLL). These loans have favorable terms that are contingent on the achievement of certain ESG targets. Failure to meet them may result in higher interest charges or penalties.
Unlike their better-known cousin, green bonds, which finance “green” projects, SLL proceeds can be used for general corporate purposes or development. Companies can incorporate tailored ESG commitments into financial planning and incentivize progress towards specific goals.
One company at the forefront of sustainable finance is HP. In 2021, the company debuted its first ever $5 billion SLL and a $1 billion 10-year sustainability bond. They secured reduced loan pricing once they achieved it two ESG goals: reach net zero greenhouse gas emissions by 2040 and double the number of Black executives by 2025.
As a technology banker, the SLL growth numbers make me hopeful. US SSL volume increased by 292% to $52 billion from 2020 to 2021 (paywall). Furthermore, the issuance of green and sustainable bonds is envisaged break the $1 trillion barrier for the second consecutive year in 2022.
What additional benefits do companies see from leveraging sustainable finance? It encourages them to improve ESG data reporting and could motivate them to make more progress in diversifying their workforce. The more progress technology can make on these fronts, the better it will be for business — and for its role as an industry at the forefront of ESG.
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