How does ESG fit with carbon-intensive new technologies?

Environmental, social and governance (ESG) transcends geographical and industrial boundaries. No matter the company’s footprint or aspirations, ESG is a universal agenda item. It touches almost every aspect of business, including employees, portfolios, investments, supply chains and clients. But how do companies reconcile ambitious ESG strategies with the need to digitalise and modernise when new carbon-emitting technologies are on the rise?

A lawyer by training, then a decade in investment banking, before returning to law at Simmons & Simmons as a partner and global head of ESG, Sonali Siriwardena understands the quandary from both perspectives. It is why she returned to law: “For better or for worse, law is playing a defining role in shaping the space and as advisers, we can help clients to navigate the intricacies of ESG and distil what is really relevant.”

“G” for governance is crucial for overseeing and holding companies to account for their cyber risks, data management and privacy lapses. However, Sonali focuses here on the intersection and potential clashes between environmental and social priorities and technological innovation.

Environmental risks

Amid heated debates about the ethics of machine learning, artificial intelligence and their long-term impact on humanity, the tech sector must also contend with rising demand for ESG-compliant activity.

Over the past two years, the rise of large language models, AI and blockchain, has led to an explosion in digital data globally. And demand for data centres has grown in tandem. Astonishingly, data centres now account for as much as one per cent of energy-related global greenhouse gas (GHG) emissions. These volumes will continue to grow.

Meanwhile, the world is grappling with the race towards net zero. By 2050, in accordance with commitments made by 195 countries in the 2015 Paris Agreement, GHG production should be balanced by GHG removal from the atmosphere. The overarching objective is to limit global average temperature rises to 1.5OC above pre-industrial levels, which the UN now says depends on halving current energy usage. There has been a global groundswell of net-zero aligned policy and regulation, as well as shifting public opinion geared towards meeting these goals. Corporates have been caught in the cross hairs and the tech sector has been no exception. Given the nature of digital tech as it currently stands, “you run into some very fundamental issues around energy usage and a mismatch in technological and environmental ambition that must be overcome”, explains Sonali.

Innovators find environmental opportunity in tech

Despite the energy-intensive nature of the tech sector, initiatives and developments are underway in some quarters to strike a balance between innovation and environmental sustainability.

Crypto currency providers face particular criticism for their large carbon footprints. But, in September 2022, Ethereum, the blockchain behind cryptocurrency Ether, transitioned to a new energy-efficient proof-of-stake consensus mechanism. It effectively slashed its energy consumption by 99 per cent overnight, showcasing how it can be done by other industry players too.

Google, meanwhile, has made an ambitious pledge to operate on 24/7 carbon-free energy in all of its data centres and campuses worldwide by 2030. And Stockholm Data Parks aims to meet 10 per cent of Stockholm’s heating needs by 2035 with recycled data centre heat. Both schemes will contribute to energy efficiency and reduced carbon emissions.

Other tech developments are designed to deliver better ESG performance and more reliable reporting in the business world. Among them is ChatClimate, a platform created by Ekimetrics, which sources authoritative and up-to-date scientific research to provide users with accurate answers about their impact on climate risk.

Natural language processing technologies can be used to weed out greenwashing in sustainability disclosures. This is especially pertinent in investment fund prospectuses, where ESG ratings could be inflated. “It means investors can more confidently make decisions that align with their own sustainability goals,” Sonali says: “Regulators are also actively looking to technology to help them identify, address and enforce against greenwashing.”

Existing sustainability tools are finding new applications too. Carbon Tracker, which has been widely used in the financial services sector, is now deploying AI and satellite technology to monitor companies’ real-time emissions. It assesses the type, nature and scale of emissions, helping investors to decide whether to withdraw from more polluting sectors.

Social risks

The technology sector faces long-standing diversity challenges. There continues to be a significant gender imbalance in science, technology, engineering and maths, as well as in AI research and professorships. Sonali suggests that this inbuilt lack of diversity could even have implications for prejudice and stereotyping as new technologies emerge.

A report from the University of Cambridge recently found that techno-solutionism, the use of AI tools to cancel out human biases, like racism and sexism in recruitment, may actually perpetuate bias. Where tools rely on historical data (eg, existing employees’ profiles), they will seek to replicate a workforce that already exists, spreading lack of diversity in selection processes. Whilst tech can be a helpful tool in tackling issues of diversity and inclusion, it cannot solve for underlying problems in governance or recruitment practices. Firms should look to engage beyond the surface level on these challenges and not seek to find “easy fixes”.

Sonali acknowledges that it is easier to calculate representation of women or people of colour in an organisation, than to measure performance around more nebulous constructs, like inclusion and meritocracy. In time, AI may be sufficiently intuitive to pick out such nuances. Sonali says: “Until then, a positive synergy between ESG and tech, could go a long way to delivering on social priorities."

Not there yet

For sure, ESG and carbon-intensive new technologies are mismatched bedfellows. But there is potential for greater alignment. Their convergence, in time, could deliver significant environmental and social value. Where will they take us next?