Tech risks could turn the sector into a ‘sustainability disaster’

Tech sustainability solutions can also be the sector's biggest risks, including in supply chains, taxation and data privacy

The technology sector is a double-edged sword when it comes to sustainability. On the one hand, it is presenting solutions such as semiconductor companies developing electric mobility, renewable energies and healthcare equipment, and telecommunication companies are bringing access to information, banking services and supporting the development of SMEs in underserved areas.

On the other, these solutions present risks. Electronic devices and communication technologies rely on the extraction and refining of minerals from DRC and China, and data privacy and security can threaten societies, for example.

“These risks, if not managed properly, could create a sort of ‘flip side effect’ and reverse the capacity of the tech industry to act as an enabler of progress towards a sustainable future and, worst case scenario, turn the tech industry into a sustainability disaster,” said Louise Schreiber, SRI analyst at Mirova.

“Only tech companies with sound environmental and social practices across their value chain can be considered as actual solution providers.”

Tech risks

According to Schreiber, the greatest margins for progress at this stage with tech companies are supply chain risks, responsible products, fair tax practices and data privacy.

Supply chain risks include labour and fundamental rights of workers, responsible sourcing of raw minerals, biodiversity impact of minerals refining-phase.

“At this point, it remains difficult to audit and certify the entire value-chain,” she said. “However, great progress has been made by industry-wide initiatives where companies share similar audit framework and share audit results.”

In the technology space, new products are often made at a very fast pace, with some products made with a limited lifespan. “This trend not only pushes users towards over-consumption, but also relies on the fast production of new devices, which creates the perfect ecosystem for abusive practices in the manufacturing chain,” Schreiber said.  

On fair tax practices Schreiber said a limited number of companies are disclosing their country-by-country report, while many tech companies extract most of their revenues from intellectual property, which is prone to excessive transfer pricing and aggressive tax optimisation schemes.

Finally, data collection and monetisation present issues and comes with different levels of regulation. Jennifer Vieno, ESG research manager at Sustainalytics adds that security hacks and ransomware attacks also pose ESG risks.

“The frequency and complexity of cybersecurity attacks has been increasing over the years and the amount of employees working from home due to Covid has generated new opportunities for cybercriminals to exploit vulnerable connections and gain access to sensitive corporate and personal data,” she said.

“In terms of managing these risks some companies have implemented cybersecurity training for employees and conduct regular assessments to detect security vulnerabilities.”

Unique challenges

Vieno added the tech sector can present its own set of ESG challenges, for example when it comes to talent attraction and retention.

In the first episode of our sector special podcast, in which we interview industry experts and people working in the sector, we spoke with dealroom.co innovation analyst Matteo Renoldi, who agreed talent is a specific challenge for tech.

See also: – Podcast: Technology must look after environment and society

Impact start-ups receive a lot of applications, but there are still senior and specialised roles, such as climate scientist roles, that are hard to fill, he said, because it is difficult to find senior people who are willing to work in start-ups.

dealroom.co maps more than 7,000 impact start-ups in a database against the UN Sustainable Development Goals (SDGs). Renoldi said he has seen global VC investing into start-ups tackling SDG 13 (climate action), reach €16bn in 2020, 3.6 times higher than in 2015, when it was €4.4bn.

“The technology sector has grown out of start-ups,” added Leon Kamhi, head of responsibility at Federated Hermes, in the sector special podcast. He said another challenge unique to the tech sector relates to engagement, due to the governance structures many start-ups have in place. “When [start-ups] come to market the founders come wanting to retain their power over the company,” he said.

“So it’s not that easy engaging with them because of that governance, there is often a dual-share structure, often without a sunset clause. And there often isn’t a lot of competition.”

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Natasha Turner

Natasha is global deputy editor at ESG Clarity, part of the Bonhill Group, and has been a financial journalist for six years. She has been shortlisted for Story of the Year and Investment Journalist of...