Executive Voices 4 mins read

Sustainability is Facing Setbacks. Yet Companies Must Still Make it a Focus.

The world’s economies and energy supplies have been upended by the war in Ukraine. However, scrapping ESG initiatives isn’t the answer.

Sanjay Brahmawar Sanjay Brahmawar

Geo-politics impacts almost every market around the world. Russia’s invasion of Ukraine, and the upheaval in the global flow of oil and gas that followed, led many governments to abruptly shift focus from slashing carbon to scrambling for alternative supplies of fuel. Germany, where energy costs have soared, is reactivating coal-fired power plants it had previously shuttered. Worldwide pension funds, endowments, and other institutional investors that had once shunned the oil and gas industry are returning, drawn by rising stock prices and projections of more fossil fuel extraction and use in the years ahead.

A priority that’s being questioned

What does all of this mean for companies? For some, it might be tempting to use this climate backsliding as an excuse to throttle their own sustainability commitments. Until recently, corporate progress toward operating more sustainably—in ways that incorporate environmental, social, and governance (ESG) goals directly into business strategy—was rising across nearly every sector. Every company is at least considering ESG, with 92% making it a priority or top priority.

Yet the renewed appetite for oil and gas has caused some to question whether the importance of ESG may have peaked. Critics say sustainability has become a distraction from the primary objective of business: turning a profit. For some companies, ESG commitments have become less about driving real change and more about optics: Cases of greenwashing—making false or misleading claims about one’s environmental credentials—are increasingly making headlines.

To compound these doubts and risks of greenwashing, organizations that are genuinely committed to more sustainable operations often struggle to measure their progress. Without the right processes and tools, gathering reliable sustainability data, like the carbon footprint of a firm’s servers, or the amount of e-waste it recycles, can be next to impossible. In our survey, 57% of companies that reported measuring ESG performance face challenges due to the quality and availability of ESG data. 48% cited difficulties linked to a lack of underlying technology to automate data gathering and analysis. Only 4% said they do not face any ESG measurement obstacles.

Why scaling back on ESG isn’t the answer

Despite these obstacles there are signs that ESG considerations are becoming more important to businesses, not less. Following the invasion of Ukraine, hundreds of multinational companies suspended their operations in Russia—an indication that the social dimension of ESG is gaining prominence. Companies across industries and geographies are taking ever-greater steps to safeguard the well-being of their workforce, while demanding ethical labor practices from their suppliers. Although intergovernmental climate talks have not progressed as fast as experts say is necessary, companies themselves are picking up the slack: More than 5,000 businesses have made net-zero pledges as part of the United Nations’ campaign “Race to Zero”.

These commitments are not merely about improving lives and saving the planet: they’re also about seizing opportunities. Like digital before it, the sustainability disruption is driving innovation and opening up new multibillion dollar industries: from renewable energy, to electric cars, to finance. According to data from Morningstar, the value of assets managed by “sustainable” funds sits at $2.7 trillion. Incentives for businesses to act are coming from all quarters. A 2021 survey by Deloitte found that 75% of C-level executives reported pressure to act on climate from their customers or clients, and 65% felt pressure from their staff. Governments, including those who’ve long been climate laggards, are finally coming around as well: a bill signed into law by U.S. President Joe Biden in August includes $369 billion worth of incentives to help transform the American renewable energy sector.

With the right tools, sustainability can be your accelerator

In this environment, we believe that companies cannot afford to take a wait and see approach. For all sustainability’s recent setbacks, firms’ stakeholders and shareholders are expecting them to act now—to reduce their environmental footprint and ensure their operations achieve societal impact. While the ability to measure ESG is still a work in progress, the standardization of reporting and disclosure frameworks is already taking place and the gathering of data will continue to improve over time. At Software AG, many of our customers have begun using digital tools to drive this process—by tracking the carbon footprint of their power providers or making changes to their IT landscape that underpin their broader corporate sustainability strategy. Others are integrating their sustainability goals into business process management, driving efficiency gains in operations that also help them become greener.

Real sustainability, just like digitalization, can be an accelerator. It’s synonymous with optimization. As we make the shift to the information economy—defined by the use of data and insights for making smarter, more intelligent decisions—there’s never been a better time to embrace both.