ESG + Digital Integrated Transformation (ESGDX)

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As managing ESG (environmental, social, governance) and sustainability issues have become mainstream business practice, there is no doubt in the minds of corporate leaders that ESG/sustainability issues should be a top priority agenda in boardrooms. However, it is still challenging to integrate ESG/sustainability considerations fully into business practices due to the difference between short-term financial goals and longer-term ESG/sustainability performance. Thus, top executives usually give weight to the shorter-term financial metrics when trade-offs between financial and ESG/sustainability performance come into focus.

Since the first industrial revolution, which gave rise to stockholders’ capitalism, the purpose of businesses and the focus of management has been the single-minded pursuit of profit. Adding environmental and social responsibilities to stakeholders is now fundamentally changing corporations and their governing bodies. With the fourth industrial revolution, powered by digital transformation, firms’ focus broadened to include stakeholders in addition to stockholders. As ESG transformation takes hold, another technology-driven trend-Digital Transformation, is challenging companies’ business models, employee relationships, and governance practices that have been in place for hundreds of years. This twin transformations journey prompts the emergence of new business and operational frameworks. Digital and ESG integrated transformation (ESGDX) enables digital sustainability for optimal use of digital technology to secure competitiveness, growth, and positive ESG/sustainability impact.

ESGDX Imperative

According to Accenture[1], “companies that integrate digital and sustainable transformations into their operations and value chains are 2.5 times more likely to be among tomorrow’s best performing businesses than those who don’t.” Accenture suggested that enacting business models driven by sustainability and enabled by technology is a possible way of executing ESGDX.

According to WEF[2], successful business leaders will seize a new post-COVID 19 pandemic opportunity by expanding their competitive advantage and delivering long-term value by deepening the integration of ESG/sustainable practices across their business and value chain and digital transformation. “Effective leaders will need to integrate ESG/sustainability considerations within their core business strategies to determine where new value exists, which business models will capture it, and which digital and data-driven technologies will enable them to meet their objectives.”

According to Schneider Electric[3], “sustainability and digital transformation benefits go hand-in-hand through the assimilation of ESG/sustainability and digital transformation:” New data generated through digital transformation and utilization of the data result in creation of new processes that drive higher efficiency, agility, productivity, circularity, and sustainability operations.

Digital transformation is the adoption and integration of digital technologies to transform all areas of business functions: fundamental change of an organization’s business operation; cultural change of an organization’s way of working; transformation of customer experience etc. Technology, data, and organizational change capability are the core elements of digital transformation, and they must function well together.

The essential part of digital transformation is leveraging data and digital capabilities in an innovative way to reshape customer value propositions, to transform operating models for greater customer interaction through the efficiency and productivity gains within an organization and across the supply/value chain, to accelerate product and service innovation, and to provide new ways of monetization.

ESGDX requires a strategic development of business model[4]  for profitably sustainable business practice. The strategic development of the business model should consider strategic purposes, industry context, competitive pressures, customer expectations, and core competencies. By Integrating ESG/sustainability into digital business model (Sustainable Digital Business Model (SDBM)), a company can generate revenue streams, achieve cost savings, reduce business and ESG/sustainability risks, improve sustainable resource use, increase business resilience, gain customer trust, and expand market opportunities. Thus, SDBM for embedding ESG/sustainability considerations into a digital business model can serve as a growth engine by improving a company’s operations/products/services and by creating new market opportunities/revenue streams through the orchestration, optimization and dematerialization of resources and assets.

ESGDX Framework

ESGDX framework for profitably sustainable business[5] corresponds to the development and execution of the components of SDBM: Sustainable digital value proposition, Sustainable digital value creation, Sustainable digital operating model, and Sustainable digital value capture.

Sustainable digital value proposition:

Sustainable digital value proposition reshapes value proposition (products/services to target customers, measurable environmental/social values (positive impacts)) to stakeholders, trust, and resilient business) using digital capabilities, customer/stakeholder relations, and marketing channels.

Sustainable digital value creation:

Sustainable digital value creation refers to producing/providing products/services to target customers and environmental/social values to stakeholders using digital capabilities and business resources/assets sustainably (e.g., sustainable/circular products/services development).

Sustainable digital operating model:

Sustainable digital operating model refers to delivering the created values using digital business processes (e.g., intelligent workflows/process automations), supply chain/value networks, and sustainable business operation (e.g., integrate ESG considerations into business operational decision-making criteria).

Sustainable digital value capture:

Sustainable digital value capture refers monetizing the created value through profit formula (revenue/cost structure). Profit formula includes revenue generation/cost reduction through efficiency/productivity gain/new market opportunities/new monetization models (e.g., digital servitization) by digital transformation and sustainability opportunities/risks management.

Conclusion

ESGDX promotes growth by balancing financial and ESG/sustainability goals simultaneously through a strategic development of the business model for profitable and sustainable business practice. Integrating ESG/sustainability into a “digitally transformed” business model or SDBM serves as a growth engine by improving a company’s operations/products/services and by creating new market opportunities/revenue streams. ESGDX framework for profitably sustainable business corresponds to the development and execution of the components of SDBM: Sustainable digital value proposition, Sustainable digital value creation, Sustainable digital operating model, and Sustainable digital value capture.

[1] The European Double Up: A twin strategy that will strengthen competitiveness, Accenture 2020

[2] Bridging Digital and Environmental Goals: A Framework for Business Action, World Economic Forum MARCH 2021

[3] Why sustainability and digitization go hand-in-hand, TechNative OCTOBER 28, 2021

[4] A business model describes how a company can create, deliver, offer, and capture value: customer value proposition is to offer the created value, the operating model is to deliver the created value, product and service innovation is to create the value, and value capture is to monetize the created value through the pricing mechanism and cash flow generation.

[5] ESGDX framework for profitably sustainable business can be a practical way to implement a corporate purpose as explained in The Difference Between Purpose and Sustainability, Harvard Law School Forum on Corporate Governance: “The purpose of a company is to produce profitable solutions to problems of people and planet, while at the same time not profiting from producing problems for people or planet—a failure in sustainability. Long-term sustainable value creation starts with clarity of purpose. The products and services that are the solutions for people and planet will need to change as the world evolves in terms of its sustainability concerns about the negative externalities created by these solutions. Addressing these externalities must be done in a way that keeps the solutions profitable. Failure to do so will result in sustainability detracting from purpose, rather than supporting it.”

Vincula Group is an international business performance consulting and professional services firm. Vincula works with Company Boards and their Executives to ensure that Assets, Strategy, Technology, Implementation Plans and Trained Resources are in place to compete effectively in the hypercompetitive business environment.

Alex G. Lee, Ph.D., Esq., is a partner at Vincula Group. Alex is an emerging IT/digital technology innovation and sustainable business strategy expert with 30 years experience in the High tech industry. Alex is a CEO and principal consultant at TechIPm, LLC, a New York State attorney and a founder of ESGDX Forum. Alex holds a Ph.D. degree in physics from the Johns Hopkins University, a J.D. degree from the Suffolk University Law School and executive certificate in strategy and innovation from MIT Sloan School of Management.

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