Microsoft is known by households and businesses for its enterprise software (the ‘Windows’ brand) and hardware that help their productivity. What Microsoft may not be known for are its efforts to positively affect society via its leading sustainability and ESG initiatives.
The focus on sustainability is a priority and is ingrained in Microsoft’s culture. Microsoft uses its influential innovative technology culture to drive change in the areas in which it can ‘do good’. However, like all companies, Microsoft faces many challenges and risks related to sustainability.
Microsoft has made one of the most striking environmental commitments to its shareholders and society – the commitment to become carbon negative by 2030, and by 2050 to remove the carbon Microsoft has emitted since it was founded in 1975. Microsoft is going beyond the UN Paris Agreement, which seeks to limit global warming by countries and companies being net zero carbon emitters by 2050. The company intends to remove more carbon than it emits by 2030 and invest in technology that will benefit society more broadly in reducing emissions. These commitments are not simple tasks.
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While Microsoft is actively investing in environmental initiatives that are beneficial, there are many challenges to its strategy. Challenges come from the circular economy, as well as changing consumer and supplier behaviours.
- Circular economy: The ability to reduce waste, to reuse waste and to reuse used products. The circular economy presents an interesting philosophical debate for companies. Companies must decide between selling more goods (positive for revenue growth), building more durable goods (extending the replacement cycle), which parts to use (recycled materials aren’t always cheaper or require greater initial investment) and offering affordable goods (a range of price points for consumers across all income ranges). Microsoft continues to navigate its circular economy journey; the company is assessing how to incorporate recycled materials into hardware and is targeting 100% recycled packaging by 2030. The more contentious element, perhaps, is the ‘right to repair’. Repairing electronic goods extends the life of the product; in effect, reducing the waste footprint globally but also reducing sales in the short term. Microsoft has always offered repair at authorised retailers; however, the cost can be prohibitive, reducing the likelihood of repair. Historically, Microsoft has received negative press on this topic and has been actively working to improve transparency in repairability of its hardware.
- Changing consumer behaviour: Consumers are responsible for how they use a product and how they dispose of a product. While Microsoft invests in more energy-efficient hardware and software, and hardware that is increasingly recyclable, it can’t control how consumers use the goods. Consumer behaviour will be one of the most challenging obstacles in reducing Scope 3 emissions. This is an obstacle that most companies are tackling.
- Changing supplier behaviour: Driving change at suppliers is another challenge. Microsoft needs to walk the tightrope of business continuity and sustainability. Likewise, it isn’t in the best interests of the community for Microsoft to cease working with partners that aren’t maintaining the required sustainability standards. Through continuous engagement, Microsoft can work with suppliers to improve operating practices.
Microsoft is proactive on many social initiatives, seeking to use its influence and technology for good while seeking to improve equality and inclusion.
- Lawful surveillance: Microsoft provides advocacy services and refuses to deploy facial recognition technology in scenarios that put freedoms at risk.
- Closing the digital divide: Microsoft Airband Initiative will bring broadband access to more than 40 million people in unconnected communities around the world by 2022.
- Affordable housing: The company is investing US$750m to increase the supply of affordable housing in the Seattle area.
- Diversity and inclusion: Microsoft is committed to doubling the number of Black employees in leadership roles by 2025, and doubling the number of Black-owned approved suppliers by 2023.
While Microsoft seeks to use its size and technology for good, size can lead to increased risk. Microsoft stores sensitive information and allows for critical infrastructure operations for its clients. Sensitive information means Microsoft is more vulnerable to attacks from bad actors seeking to access that information. It is critical that Microsoft continues to invest in cybersecurity to minimise the risk of security breaches, maintaining the trust of clients and the integrity of client businesses.
Microsoft has shown the world that you don’t have to compromise strong shareholder returns for leading sustainability commitments. The company is paving a path for corporations and for governments on environmental initiatives and social impact. We view this forward-looking approach as a key facet of our investment thesis of the software giant. Microsoft is investing in the future of its brand and the community and strengthening the moat around its future cash flows.
Sources: Company filings and website