Sustainability is top of mind for companies around the world, and environmental, social and governance (ESG) objectives have become major considerations in companies’ digital transformation programs. In a recent digital transformation study, more than 60 percent of respondents identified ESG factors as a primary objective or key criterion for selecting and prioritizing digital initiatives, and more than 80 percent of companies plan to increase their investments in sustainability. But placing ESG at the top of the priority list does not guarantee success.

This study, which involved more than 850 companies worldwide, shows a clear link between digital capabilities and sustainability. Companies that are successful in their digital transformation are almost twice as likely as other organizations to consider ESG objectives as a key focus of digital initiatives.

One reason for this is that successful companies are moving from digital reengineering to innovation, as they move beyond the challenges of implementing transformation and focus on how their new capabilities can help capture broader opportunities across the company’s agenda.

It seems timely from this study that leaders must merge their digital and sustainability agendas. Digital capabilities are critical enablers for sustainability initiatives, and there are digital prerequisites for achieving sustainability goals. We explore these in more detail below. But first let’s look at how companies are defining their digital E, S, and G priorities.

ESG priorities of organizations in relation to digital transformation

There are significant differences across industries in terms of the importance companies place on ESG and the extent to which each industry emphasizes E, S, and G. While one in four companies make GSE the primary focus area of their digital transformations, the percentage across industries ranges from nearly double (in medtech, biopharma, and automotive) to about one in 10 (for telecom, software, fashion, and luxury). But even in lagging sectors, digital leaders are placing a high priority on GSE: 38% for telecom and 64% for software, for example.

At the same time, while climate change has brought environmental considerations to the forefront, companies’ investments cover all three aspects of sustainability. Overall, 80%, 70%, and 69% of companies have digital initiatives focused on social goals, governance considerations, and environmental programs, respectively. Again, there are significant differences by industry and region. Companies in the most people-focused sectors (employee- and customer-focused sectors), such as healthcare and consumer goods and services, are most likely to prioritize social initiatives, while companies in the energy sector and industrial goods manufacturers emphasize environmental initiatives. Governance and social initiatives are top priorities among financial institutions and insurance companies. The increase in cyber-attacks and the shift to remote work modes are driving these concerns.

Regionally, social initiatives are the highest priority in North America and Europe, where concerns about diversity, equity and inclusion are strong, while governance initiatives top the list in Asia. Companies in Europe (74%) and Asia (71%), where most countries are net consumers of energy, are more likely to prioritize environmental initiatives than companies in North America (64%), a major center of fossil fuel production and use.

Using digital technologies to advance the GSS program

For leaders thinking holistically about how to advance their sustainability initiatives, technology can act as a major gas pedal. We call this mindset the technology eco-advantage: using advanced technologies and workflows to enable cost-effective solutions that also positively impact ESG goals.

Using advanced digital tools requires certain capabilities to be in place. Here are five prerequisites that our research and experience show are essential to advancing ESG initiatives.

1 – Sustainable development and growth must be considered together

Sustainability offers opportunities for growth and cost reduction, putting a new light on the need to reduce the carbon footprint or comply with social or governance regulations. These opportunities may involve disrupting a company’s core business by offering low-carbon alternatives or creating new products and services that expand accessibility. For example, Norwegian crop nutrition company Yara International, founded in 1905 as the world’s leading producer of mineral nitrogen fertilizers, now offers a portfolio of digital agricultural solutions that enable farmers to maximize crop yield and quality while reducing environmental impact. As the company’s CEO says, “Over the past few decades, Yara has evolved from an asset owner and fertilizer producer to a full-service solutions provider for both farmers and food companies. We are moving from volume growth to value growth.”

Such opportunities require companies to be able to innovate quickly and drive innovation throughout the organization. Digital capabilities-such as fully agile teams that can make and implement decisions independently, performance-based funding mechanisms, and rapid and flexible technology adoption-are crucial for companies to enable such innovation.

2- You can’t systematically reduce what you can’t measure

Our research clearly shows that companies are using digital tools in a variety of ways to assess their opportunities and progress. At the level of individual initiatives, the top environmental priorities are optimizing the supply chain (a priority for 83% of respondents), reducing energy consumption in offices, factories and buildings (78%) and using analytics to reduce waste (73%). The top social priorities are ensuring the protection of customer, employee and consumer data (86%), improving employee collaboration with digital platforms (83%) and improving diversity and inclusion (80%). Critical incident risk management (including building cyber resilience), real-time risk monitoring, and predictive risk analytics were the top three areas of governance concern, interest, and priority for 89%, 86%, and 82% of respondents, respectively.

But the real value comes from the ability to integrate internal data with data from a broader supply chain or ecosystem to identify areas of focus beyond the company’s own processes. This requires an infrastructure based on application programming interfaces as well as advanced human capabilities to manage data collection and analysis and orchestrate relevant conversations. For example, a software solution has been developed using AI to accurately measure end-to-end emissions directly produced by a company’s operations and quantify the more difficult-to-measure indirect emissions produced throughout the company’s value chain.

3- Dynamic environments require digital decision support

Reducing a company’s carbon footprint often involves making difficult and complex decisions that disrupt work processes. Redesigning a supply chain, for example, or moving from an in-person to a remote delivery model are significant changes that affect both people and processes. Analysis paralysis is a real risk when there are many variables and the cost of error is high.

The ability to leverage artificial intelligence (AI) and advanced analytics to support these decisions allows companies to act faster and more confidently, and make bolder decisions.

A large European minerals company, for example, used a digital energy control tower with a cloud-based data platform, AI and advanced analytics to create an end-to-end model for an integrated energy management solution. As a result, it has achieved a 5-10% reduction in energy consumption, and is on track to save €8-9 million per year in costs.

But being able to rely on AI requires very advanced data capabilities and a level of familiarity and comfort with advanced tools that can only be acquired over time.

4- Tracking, monitoring and mitigating risks are more important than ever

Being able to quantify the risks associated with external factors such as climate change (e.g., the impact of a combination of adverse events) or cyber incidents (e.g., data theft or system hacking) are growing priorities for many companies. In fact, 89% and 86% of companies, respectively, have made critical incident risk management and real-time risk monitoring priority digital initiatives.

Understanding how external events can affect the supply chain, supplier base or customers in real time, and being able to translate those risks into financial impact, is a complex undertaking. Having access to the right data, the right algorithms, the right decision mechanism, and the right governance is critical.

In addition, these capabilities allow companies to achieve a level of transparency around decision making and accountability, both internally and externally, that would not otherwise be possible, leading not only to better risk prevention but also to faster and more effective mitigation efforts.

5- Access to platforms and ecosystems is essential

Most companies cannot solve climate and sustainability issues on their own, or in the time frame necessary to make a broader social impact. For example, 72% of companies cite data collection through the Internet of Things (IoT), production process monitoring, and environmental impact assessment as priorities.

Digital capabilities are key to leveraging innovation platforms and ecosystems, such as those orchestrated by Caterpillar and John Deere in agriculture, Honeywell in data, and Schneider Electric in energy production and use. It is not necessary to orchestrate a new ecosystem, and not all companies are in a position to play the role of orchestrator. Contributing to an existing ecosystem can be just as valuable.

Achieving ESG goals and making sustainability a competitive advantage requires integrating technology and data from the start. Ensuring that the digital prerequisites for ESG initiatives are in place is an essential first step.

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