Last year, incoming SEC chair Gary Gensler wasted no time in signaling that ESG—environmental, social and corporate governance—would be a top priority of the Biden Administration. Since then, companies, ratings agencies, and even the White House have waited on pins and needles to see what the new rules will entail. Finally, they have their answer. On Monday, March 21, the SEC proposed sweeping changes requiring publicly-traded firms to disclose climate risks in their regular financial statements starting next year.
At stake are the tens of billions of dollars that investors have poured into ESG-related stocks and funds in recent years—including a record $120 billion in 2021, more than double 2020’s previous record of $51 billion and a tenfold increase since 2018. The SEC’s proposal has made the choice clear: decarbonize now and reap the benefits, or wait for regulators to do it for you.
For companies grappling with fallout from Omicron, inflation, and supply chain disruptions, the renewed urgency of sustainability mandates has leaders scrambling. Where do they start? What should they measure? What are the goals, and how do they get there? Amidst this uncertainty, an unlikely figure has emerged from the C-suite as pivotal to these efforts: the CIO. Traditionally a supporting role, CIOs rose to newfound prominence during the pandemic as entire organizations moved online—in some cases, literally overnight. As a result, IT now underpins nearly all lines of business while becoming one of the fastest-growing sources of energy consumption. Whether by accident or design, CIOs now stand at the crossroads of drafting and implementing ESG strategies—or risk being caught in a crossfire if they don’t.
“Because there isn’t one person who owns ESG in most organizations, CIOs will really be the ones in a position to herd the cats—multiple stakeholders with multiple mandates, all needing different tech enablement,” explains Marsha Reppy, technology consulting partner at Ernst & Young LLP. “That’s the challenge.”
THE FIVE ESG PRIORITIES
While the SEC deliberates, businesses aren’t waiting around. Starting in 2017, the Task Force on Climate-related Financial Disclosures—a private-sector working group convened by the G20—began formulating a framework, metrics, and targets for ESG that it hopes will be the basis of future regulation. As one of the group’s members, Ernst & Young LLP identifies five priorities for firms looking to make headway quickly: decarbonizing existing processes, ensuring more sustainable services and practices, investing in green infrastructure, switching to a sustainable supply chain, and implementing the risk and compliance necessary to account for all of the above.
So far, so good, although this list can trigger an organizational dilemma if each priority is parceled out to the executives nominally in charge, (e.g., head of supply chain), producing a fragmented, rather than holistic, response. This is where the CIO—one of the few cross-cutting roles within most organizations—comes in. “Not only do they have to meet the requirements of each stakeholder, but also connect them,” Reppy says. “They’re the ones who must ensure the strategy isn’t five different silos, but a single vertical integration.”
Doing so will require an inside-out approach. On the one hand, CIOs should grow more vocal and hands-on in defining ESG goals in tandem with their strategic counterparts. They have a role to play in benchmarking the performance of current systems, setting targets and sketching road maps with “chunky, digestible pieces,” as Reppy puts it, designed to achieve quick wins for organizational buy-in, accompanied by a long-term path to decarbonizing supporting systems.
DRIVING INTERNAL CHANGE
At the same time, they must seize opportunities to set and achieve ESG targets within their immediate remit, such as increasing the mix of renewable energy sources for data centers or adopting a circular life cycle approach when it comes to procuring hardware and services. “Two of the things I would ask my vendors are: ‘What is their carbon footprint?’ and ‘How can they share that information so I can incorporate it into my own decision-making?'” says Lior Keet, managing director of emerging technology for Ernst & Young LLP.
CIOs should huddle with their peers in sourcing and procurement to clearly define criteria for the greenhouse gas emissions, material impact, and supply chain risks of their own decisions, Keet adds. “They need to get their own houses in order before they start throwing stones elsewhere in the organization.” Even little things, such as designing programs to recycle e-waste or donate hardware, will help set standards and establish legitimacy.
The latter is key, because the most persistent question Reppy hears inside most organizations is one the SEC has stridently tried to answer: Is this real? “Yes, this is real!” she says. “Big changes are coming, some pushed by regulators, some by your ecosystem, including consumers and your customers.” Ask yourself: Do you want to be the one driving change internally and to your stakeholders, or do you want to have those changes forced onto you?
In the post-pandemic future, the person in the role who is best poised to answer these questions is one that few would have expected just a few short years ago.
The views expressed by the author are not necessarily those of Ernst & Young LLP or other members of the global EY organization.