Harnessing sustainability to drive value from your IT investments

More and more individual investors and investment funds are changing their strategy from investing in companies with a poor track record across ESG to investing in companies with sustainability at their core. An example of this is a recent announcement by UK Pension funds worth £900bn of their commitment to have a net zero portfolio by 2050 or earlier. This movement of money is driving awareness and the importance of being a sustainably minded company at the individual shareholder level but also at the board level. Performance against ESG metrics is no longer a corporate slogan but now critical for any companies’ strategy.

Although ESG is a fairly new term, it has been an emerging consideration for most forward-thinking boards for decades. From supply chain management, to customer interactions and to IT investments, there will always be an impact on aspects of Environmental, Social and/or Governance issues.

• Environmental (E in ESG) – includes the energy that your organization requires to function as a business, including supply chain, B2B and B2C transactions, as well as waste emissions. This is your business’s contribution to climate change.
• Social (S in ESG) – this is your business relationship with people and institutions that make up the community that the business operates in.
• Governance (G in ESG) – addresses the internal systems, controls, practices and procedures that your business uses to comply with the laws and regulatory standards.

Therefore, it makes sense to ensure that when a company looks to start any IT investment or an analysis of its supply chain, that Business Value and ESG Value are both given equal consideration.

What is ESG value?

ESG value is derived from the value that is generated from improving the ESG metrics. For example, through reducing the amount of electricity generated from fossil fuel usage, the business not only reduces its carbon footprint but, as a result of improving energy efficiency, it can reduce its energy bills too. The improvement in the ESG metrics will improve the financial metrics mentioned above and show to the C-Level executives that the IT investment brings financial value through the enhancement of ESG value.

Sustainable investment – a pure green initiative only – has still a limited application in most industries, whereas the investment in technology has been exponential; digitalizing core processes (internal and external) has become a high priority for most companies in COVID times. Infosys Consulting is positioned in a unique space, having created and implemented many types of these technology led IT investments. Our expertise focuses on demonstrating the connections between the financial value generated by these ESG metrics.

Put simply, every corporate investment today should be appraised both from a financial and sustainable point of view, and there is strong interdependency between the two.

Talk to C-Suite about Value

Infosys Consulting’s Value Realization Methodology (VRM) forms part of our modular framework for large business-focused IT investments.

VRM is a proprietary framework developed and tested over the years, which provides dedicated approaches, tools and accelerators to help clients maximize tangible value for their business and IT investments.

The VRM methodology enables conversations with not only the stakeholders running the IT investment or at the coal face, but also the executives at C-Level. The C-Level executives are the ones with the budget, who will spend only if they are shown a concrete business case with strong financial benefits. It is therefore vital that the business case has solid foundations and that any benefit is clearly articulated and concise, which is where VRM comes into its own. Through a value diagram and business case, and analysis of the key financial metrics (IRR, ROI, Payback and NPV), VRM shows a visible link between the IT investment initiatives and tangible/in-tangible value delivered to the business.

The methodology has been customized in recent years as a result of the refocusing of the transformational lens towards the green transition elements of an IT investment. We can use the VRM methodology to not only track business value, but also the value and the benefit associated with a green transition – at Infosys Consulting we call this ESG Value.

Map Environmental and Social Benefits to Business Value

Our approach is to extend our proven toolset, starting by mapping the ESG metrics to the value levers/drivers onto our VRM model.

The mapping helps to create visual links to the direct and in-direct ESG benefits. As a consequence, they can be first quantified in terms of impact to the triple bottom line, and then reported as part of the VRM benefits reporting dashboard – or, if in-direct, as part of an ESG metric performance dashboard.

In this way, the CFO can clearly see the connection between the NPV, ROI and EBIT of the company investment, and the direct and indirect contribution of ESG metrics.

Below, we have listed some examples of factors which show both a strong commitment and poor commitment to ESG improvements that can be mapped to the value levers of the VRM methodology. These examples make it is possible to see the impact to the triple bottom line.

VRM Value Lever/ Driver	Strong Focus on ESG Factors	Poor Commitment to ESG Factors
Increase Revenue	Stronger consumer growth due to a better reputation – sustainability ranks only second to brand quality in terms of purchasing loyalty Sustainability makes a brand stand out and can drive additional revenues from premiums Wider market through attracting B2B/B2C with more sustainable products/services Better reputation makes doing business easier – more trustworthy brand Social champion will improve the brand e.g. Brewdog offering its pubs/bars as vaccination centers Innovation driven by sustainability can drive substantial revenue e.g. Nike’s sustainable k brand is a $1bn business	Consumer attrition through lack of focus/commitment to ESG resulting in loss of revenue Potential shutdowns from poor compliance with ESG (e.g. chemical leaks/worker strikes…) Reputation loss through investigations/articles around practices Impact on market reach if advertisement/marketing limited by regulatory sanctions e.g. fast food before 9pm/tobacco advertisement ban in Formula 1
Reduce Costs	Lower utility costs through reduction in consumption via green energy Increased flexible working reduces payroll and administrative costs Improved productivity through commitment to ESG and employee wellbeing – In a Society for Human Resource Management survey, 55% of said that strong sustainability programs improve morale, and 38% said they increase loyalty Attract greater and diverse talents Reduced risk of fines as a result of non-compliance with regulatory standards Achieve a better credit rating through better governance – cheaper borrowing	Cost increase in the long term through reliance on fossil fuels Employee churn increases costs per unit Wastage of energy through inefficient practice Incur fines, penalties or enforcement actions if non-compliance with environmental or social standards e.g. Boohoo not meeting the minimum wage Credit rating hit as a result of weak promises/future prospects affected by environment issues
Reduce Working Capital	More efficient work practices and higher productivity will drive down working capital required per unit Avoid investments that do not pay off in the long term due to the impact of environmental issues Lower financing cost for working capital	Capital requirements will be stable or increase if inefficiencies remain both in the workforce and in the production of goods/services Higher financing cost for working capital
Improved Fixed Asset Efficiency	Through ESG principles invest in sustainable plant and machinery, improving efficiency in the long run Adopt sharing economy principle would reduce the reliance of fixed-assets	Cheaper/less sustainable plant and machinery will have to be retired sooner/repaired more often Toxic assets write-off
Reduce Tax Rates	Improved governance will improve the relationship with government/regulators – earn subsidies/government support Enhanced tax breaks for ESG champions – e.g. using electric delivery vehicles reduces road tax, congestion zone fees etc.	Greater tax penalties on products e.g. tax on cigarettes Off-setting green cost/taxes Regulatory/government oversite on company as a result of poor ESG performance e.g. oil and gas

The end-to-end sustainable value journey

Through our “sustainable value scan” we identify the pain points and the business capability requirements which constitute the rationale for change. These are addressed by a set of operational improvements that get delivered during the execution of the IT investment (the change delivered by the transformation). All of the above are visually represented in our value diagram and quantified in our business case toolset, where we collect the financial KPIs alongside the ESG metrics (the latter have been modelled using the latest WEF standards and the Ellen MacArthur Foundation’s Circulytics metrics as our “green baseline”).

Our model aims to capture direct contribution and in-direct contribution to the triple bottom line, highlighting the positive returns, not just in terms of financial returns, but also in terms of social improvements and environment advances.

The table provides several examples that we typically capture in our modeling. For some, it is easier to see the connection and the tangible impact on the bottom line. For example, the investment in greener energy infrastructure would reduce the overall operation cost. Or a greener asset base would be reducing the financing cost (lower WACC available on the market for green assets).

Some may result in a combination of direct and indirect impacts. For example, the flexible working model where there is flexibility in whether you work from home or the office and the hours that you work, which may allow you to pick up kids from school or act as an adult carer. This would enable employment of people that previously would be cut-out from the employment market, in doing so reducing the overall cost of employment (by offering other non-monetary benefits as compensation) and resulting in higher employee satisfaction. This would be reflected in improved KPIs such as diversity and inclusion, gender pay and equality, number of jobs created and net economic contribution.

Furthermore, there are more studies showing the positive correlation between employee satisfaction and shareholder returns. A recent study from London Business School found that the Fortune 100 companies that focused on sustainability generated 2.3 percent to 3.8 percent higher stock returns per year than their peers over a greater than 25-year horizon.

Realizing the ESG Value and Reporting the Benefits

The final piece of our methodology focuses on governance and reporting.  The ESG KPIs enable us to not only create a governance framework around the sustainable value realization, but provide ongoing reporting of the business’s performance against said KPIs.

By providing both direct and in-direct reporting, the C-Level executives (both CFO and CSO) and other key stakeholders are able to see the benefit to the business of improving ESG KPIs, starting a self-propelling virtuous cycle.

Now more than ever, it is vital that a company has the ability to report on the financial and non-financial ESG performance, not only because it is quickly becoming part of the standard reporting package, but also as it is something that shareholders are expected to be able to see. It can prove a differentiator amongst consumers and B2B customers who may only want to do business with an organization that has actual green credentials.

More and more companies are wanting to become “green” and try to achieve this through “greenwashing” – where they use a small or irrelevant example of something “green” they have done as an example of their green credentials. With the VRM analysis of ESG metrics, we ensure that improvements in ESG are realized and reported and are not simply greenwashing, paving the way for your company’s sustainable and prosperous future.

References

• World Economic Forum International- Toward Common Metrics and Consistent Reporting of Sustainable Value Creation; January 2020
• Circulytics – measuring circularity – Ellen MacArthur Foundation
• GRI Sustainability Reporting Standards- Consolidated Set Of GRI Sustainability Reporting Standards 2020
• Sustainalytics – ESG Risk Ratings White Paper Volume One; October 2018
• McKinsey – Five ways that ESG creates value,  November 2019  by Witold Henisz, Tim Koller, and Robin Nuttall
• HBR – How to Talk to Your CFO About Sustainability; Jan 2021 by Tensie Whelan and Elyse Douglas