A Users Guide to ESG at EthicsGrade: What is it? Why should you care? and How does AI fit in?
2 December, 2022
Written by Luke Patterson
Environmental, Social, and Governance (ESG) investing is a rubric through which to measure the behaviour of companies. This metric integrates considerations of social and environmental benefit into the investment process by assessing the impact of business processes for socially conscious investors. Whereas in the past one’s investment choices may have been driven solely by the promise of high returns, ESG serves to intertwine return on investment (ROI) considerations with the amount of good a company does. The business case in ESG can also be found in the increased value derived from decreased career or company risk and considering activist investors.
ESG has already emerged as a significant disruptor to the investor market and is shaking up the practices of companies seeking to attract ESG-driven investment. At the moment, this is especially true of the E in ESG – it’s now common practice for a company to produce either an annual sustainability report or an ESG report which focuses particularly heavily on environmental impact.
E nvironmental criteria are designed to assess the measures and policies a company has put in place to improve their environmental impact. For example, in a company’s sustainability report you will find statements on long-term environmental performance goals, and the steps a company is taking to reduce their energy consumption, carbon emissions and material waste.
S ocial criteria examine the ways in which a company is positively or negatively impacting human rights and well-being. Amongst social metrics would be the management of employee well-being, a written commitment to diversity and inclusion in the workforce, practices which uphold human rights across a company’s supply chain, and how a company’s actions and offerings impact their stakeholders.
G overnance criteria scrutinises the internal corporate structure of a company. Governance reviews question the state of a company’s leadership and committees, the regularity and quality of internal and external auditing of business practices, how much the company culture aligns with policy, and the executive team’s salary.
ESG investing influences everybody, even if you’re not an investment fund or a business owner. However, we wouldn’t blame you if it isn’t immediately clear why the rising prominence of ESG investing matters to you, the individual.
ESG seamlessly weaves issues that affect everybody’s quality of life into the investment process. ESG shifts the focus of investment from solely return on investment (ROI) to the amount of good an investment could contribute to the social and physical ecosystem. ESG thus considers a significantly broader pool of stakeholders that will be affected by the placement of a fund’s capital. ESG rewards companies who commit to and demonstrate responsible business practices that positively impact people like you and me. For example, if a company commits to a diverse workforce, then closing the gender pay gap will lead to a better ESG score and will consequently be rewarded with higher levels of ESG driven investment.
How does AI fit in?
At EthicsGrade, we focus on how a company’s approach to AI and Corporate Digital Responsibility affects its ESG performance. So where exactly does AI fit into the ESG landscape?
The short answer is at every stage: the E, the S, and the G.
The social impacts of the integration of digital technologies are currently the most widely publicised and understood. We’ve seen how a biased hiring algorithm can perpetuate socially unjust hiring practices at Amazon, how algorithmized credit scoring at Apple can skew against the interests of users based purely on their gender, and how disinformation on social media can sway election campaigns. These are all instances of malpractice that lead to harm and would influence an EthicsGrade rating.
However, our research accounts for issues beyond the S of ESG. Algorithms and digital technologies carry a significant environmental footprint. Digital hardware is made of finite geological resources such as lithium and cobalt, and vast data centres require huge quantities of energy to run and consume megalitres of water for their cooling. Moreover, often companies design their software and hardware in a way that doesn’t prioritise longevity. How old is the iPhone in your pocket? How many of its apps require that you update its software for them to run? Although their environmental impacts are concealed, digital technologies have a big part to play in our move toward sustainable societies.
Every company in every industry needs to be subject to scrutiny of their digital practices. The onus of the impact of digitalisation currently sits most overtly with tech companies such as Microsoft, Meta, Apple and Amazon. Yet companies in industries that aren’t so obviously tech orientated are integrating increasing levels of digital functionality into their business processes. Take, for instance, the supermarket industry, where employers have integrated digital performance trackers of their staff; the financial industry, where predictive algorithms are helping to determine the credit scores of customers; or the manufacturing industry, where workers are suffering displacement because of the increasing rollout of automated processes.
The digitalization of many industries requires an evolution of governance practices. Companies must reorient their internal policies and practices in a way which considers the innovation and deployment of ethical technologies in this digital age. As a company deploys AI-led processes, we expect them to also establish an AI ethics committee, and a set of enforceable AI ethics principles. We also expect tangible action in the executive structure reflected in company boards to host Chief Digital and Technology officers. We look for company-wide privacy and security training to be carried out annually, a robust cybersecurity system to be reviewed regularly by the board, and routinely conducted internal and external audits of digital processes.
The Bottom Line
ESG principles are changing the landscape of investing by providing a means for socially conscious investors to inform themselves on the ethical standings of companies to align their capital to their values. ESG benchmarking matters for all of us, as it incentivises companies to consider the effects of their business practices on our environment, society and governance.
As digital technologies continuously hardwire into the frameworks of companies across every industry, greater consideration of the effects of technology on our environment, our society and our governments must make its way into ESG considerations. That’s what we specialise in here at EthicsGrade, the missing link in ESG benchmark datasets. You can review the performance of any of the companies we cover by downloading one of our scorecards.