The Innovative Upside of ESG

The #ESG world is on a roller-coaster ride. Just a few years ago, corporate executives and the financial community generally viewed environmental, social, and governance (ESG) practices and disclosures as expensive distractions. Then there seemed to be a great awakening to the sustainable business merits of ESG transparency. Sparked by energy and supply chain pressures, greenwashing and other factors, this year we’ve seen another clear resurgence in skepticism and calls for the elimination of ESG policies and priorities altogether. ?

ESG is flawed, to be sure. It’s not a panacea for all that ails society, and many lax ESG practices are facing justified criticism. Yet, ESG is the best mechanism we have to guide us in the right direction to a more responsible future. Most important, ESG has been and will continue to be a powerful driver of the innovation and collaboration needed to make businesses around the world truly sustainable.?

Acknowledging ESG’s Shortcomings??

The upheaval caused by the COVID-19 pandemic and the long-overdue reckoning on social issues in the summer of 2020 unleashed a sea change in attitudes towards ESG across the global economy. Investors, policymakers, and corporate executives alike quickly coalesced around a belief that ESG could be a lynchpin for a business strategy to simultaneously drive profitability, investor returns, and equitable socio-economic advancement.?

Within a matter of months, the luster on ESG began to wane. A variety of studies emerged in 2021 and 2022 showing that ESG investing does not provide a clear-cut advantage over traditional investment approaches. Regulators in the United States and Great Britain have warned that “greenwashing” has become common in ESG claims made by companies and investment funds, while also admonishing corporate executives to improve the rigor of their ESG disclosures.??

Without a doubt, the shortcomings of ESG are real. Information in ESG disclosures is often manipulated to shield attention from damaging outcomes of unsustainable business practices. ESG-related data, cited by many companies as their biggest challenge, is often inconsistently maintained, gathered in different formats, and fails to easily interact with other data and systems. And ESG commitments are not consistently driving the systemic changes we need to improve sustainable business performance.?

The Real Benefit of ESG?

However, the rise and maturation of ESG has unleashed a wave of innovation and collaboration unlike any other time in history. For example, @GlobalDataPlc, a data intelligence firm, has noted a sharp increase in patents filed for technologies in the “green economy” over the last 10 years, particularly patents focused on innovations related to solving climate change. Every person in society, both today and for generations to come, stands to benefit from this model of continuous innovation. ?

I’m inspired by the transformation happening within my own company. At @SAP, we push ourselves to be both an exemplar and an enabler of sustainable business practices. Earlier this year, we moved our own deadline ahead by 20 years and now aim to be a net-zero emissions enterprise by 2030 . And, my compensation metrics along with my peers on the SAP Executive Board, includes driving improvements on our ESG metrics. This commitment simply would not have happened without the pressure to operate our business in a way that is aligned with ESG principles. It’s also a commitment that fuels our own innovation of technologies that can directly help our customers run their businesses more sustainably. ?

The level of innovation coming from across the broader economy as companies seize the market opportunities is being unleashed by an ESG mindset. For example, the World Business Council on Sustainable Development identified 39 innovations that are helping foster a #circulareconomy . Ranging from turning old buildings into affordable housing to an online platform that connects restaurants with charities so surplus food can go to people in need rather than to landfills, the circular economy is rapidly growing because people and organizations are looking at waste differently. They’re seeing beyond recycling to reuse, repair, and regeneration to explore wholly new business models. They’re seeing value. Circularity is an ESG-driven mindset brought to everyday life.?

Don’t Give Up on ESG?

We cannot forget that we are – at best – in the infancy of ESG as both a business practice and as a framework to ensure organizations adhere to responsible and value-creating practices. Integrating ESG into business strategy is never easy or quick, but it is an ongoing process that plays out over years rather than weeks and months.??

Consider the exponential growth in electric vehicles and green energy over the last five years. Or the potential for carbon capture and storage technology to remove billions of tons of carbon emissions from the atmosphere. Or even the new sustainable agriculture innovations that require less water and pesticides to grow abundant crops closer to consumers. These innovations represent new industry opportunities, worth billions or trillions of dollars, that will create profitable, responsible companies that can provide stable, well-paying jobs. Much of these investments are being driven through alignment with corporate ESG priorities.?

Without a doubt, ESG has a lot of shortcomings that must be addressed if it is to meet its vision to create value for companies and society alike. But just because ESG still has a long way to go does not mean we abandon it or ignore the good it fosters across society. Let's appreciate it for what it does – it pushes us to be better, to collaborate in ways that bring ideas to scale, and encourages a level of #innovation that would not have seemed possible even a decade ago. ?

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Julia White is a member of the Executive Board and Chief Marketing and Solutions Officer at SAP, one of the world’s leading producers of software for the management of business processes. In her role, White leads the product and industry solution value propositions, go-to-market approach, global brand and digital marketing, corporate communications, and government affairs. ??