The Impact of IT Capability on ESG Performance

Abstract

This study investigates the link between a firm's IT Capability and its Environmental, Social, and Governance (ESG) performance, addressing the empirical gap concerning the impact of technology investments on ESG outcomes. There are two competing views regarding this link. While some argue that technology investments enhance ESG performance, others highlight potential drawbacks, such as the rebound effect where increased overall energy use offsets anticipated energy savings. The research analyzes a dataset of 14,075 firm-year observations from 2010 to 2020, using a composite index to measure IT Capability, including the expertise of IT executives, ERP system adoption rate, IT staff quality, and IT spending. ESG performance is assessed with Refinitiv Eikon scores across environmental, social, and governance dimensions. Results show a positive association between IT Capability and ESG performance, especially in environmental performance and subcategories such as emission reduction and sustainable resource usage. These insights are important for managers and investors, highlighting that enhancing IT Capability can boost ESG and economic performance. The study underscores the strategic importance of IT in achieving broader ESG goals and encourages further exploration into how IT affects ESG practices.

Keywords: IT Capability, ESG, IT Budgets, ERP, senior executives