CEOs everywhere see the importance of environmental, social and governance (ESG) initiatives on their businesses, especially when questioned about ESG’s impact on improving financial performance, driving growth and meeting stakeholder expectations, according to KPMG Ireland.
On a global basis CEOs increasingly agree that ESG programmes improve financial performance, sitting at 45 percent (44 percent in ROI and NI), an increase from 37 percent 1 year ago. When asked where CEOs see corporate purpose having the greatest impact over the next 3 years, driving financial performance is in the top spot for CEOs worldwide as well as in ROI and NI.
ESG has gone from a nice-to-have to integral to long-term financial success and CEOs increasingly understand that embracing ESG is key to securing talent, strengthening their employee value proposition, attracting loyal customers and raising capital.
Emer McGrath, Head of Audit at KPMG in Ireland, said, “investors are looking to connect ESG impacts to financial performance and measuring and validating the outcomes. Both physical risk and transition risk have major implications for both asset allocation and investment decisions.”
Looking at some perspectives on ESG from CEOs worldwide, 69 percent (80 percent ROI and NI) see stakeholder demand for increased reporting and transparency on ESG issues and 72 percent (76 percent in ROI and 60 percent in NI) of CEOs believe stakeholder scrutiny on ESG will continue to accelerate.
Changing regulations and other pressing global economic matters are CEOs’ biggest challenges in delivering their ESG strategies. Meanwhile, to meet stakeholder and investor expectations around consistent and robust sustainability reporting, over half (52 percent) of global CEOs expect to increasingly rely on the external assurance of ESG data. This rises to about two-thirds in Ireland (ROI 68 percent and NI 64 percent).
ESG Story is Key
Meanwhile, investments are forthcoming. Sixty-two percent of CEOs say they will be looking to invest at least 6 percent of revenue in programmes that enable their organisation to become more sustainable. What’s more, 74 percent worldwide agree that their organisation’s digital and ESG strategic investments are inextricably linked (76 percent ROI and 60 percent NI).
However globally CEOs find it difficult to pick just one key driver when it comes to accelerating their companies’ ESG strategies: proactivity on social issues (34 percent), more transparency (26 percent), inclusion, diversity and equity (IDE) strategy (21 percent) and net-zero strategy (19 percent) all compete for leadership attention. This shows there’s a growing consensus that they all matter.
In terms of getting the message across, the biggest challenge for CEOs in communicating their ESG performance to stakeholders is the struggle to articulate a compelling ESG story, which more than one-third worldwide (38 percent) say their organisations face.
Economic Concerns and the Impact on ESG
As CEOs worldwide strive to maintain optimism and take steps to insulate their businesses from a possible recession, indicators point to ESG progress suffering as a result, following the trend of CEOs reassessing initiatives in many areas of the business (e.g. transformation and staffing). As economic uncertainty continues, 82 percent of global CEOs are pausing or reconsidering their existing or planned ESG efforts over the next 6 months (96 percent ROI and 92 percent NI).
However, ESG has become an intrinsic business imperative and business leaders who deprioritise their ESG commitments and retrench for the short term face an uphill battle in the medium to longer term.
The ESG Shadow Cast By the Supply Chain
CEOs increasingly see reporting and transparency as important to their ESG goals — and this includes insight into their broader supply chain. Our survey shows that a large majority of CEOs (79 percent worldwide, 84 percent ROI and 72 percent NI) either have already or plan to diversify their supply chains in response to geopolitical challenges. What’s more, the number one strategy for CEOs in Ireland and worldwide considering supply chain issues is a deeper analysis of their supply chain (i.e. at the third and fourth levels) to better anticipate problems.
Why? Because the environmental, sustainability and human rights practices of their partners and suppliers may impact their business and reputation.
For Russell Smyth, Head of Sustainable Futures at KPMG in Ireland, the demands on business are very real, saying, “the climate agenda is now so pervasive that businesses are feeling pressure from all sides – regulators are introducing new statutory climate reporting requirements, supply chains are demanding sustainable practices from their suppliers, lenders are categorising their clients on their climate exposure and consumers are seeking out products with sustainable credentials.”
Among the many challenges, decarbonising the supply chain is a significant challenge for companies looking to achieve net zero. Global supply chain leaders are starting to double down on investing in technology — including real-time, end-to-end analytics — to improve visibility across the entire value chain. They will likely have a more accurate understanding of how products and materials flow through the network and where issues are in the supply chain so that they can move from mere strategic intent to real, tangible outcomes.
Digital Systems and Accountability
CEOs are also making the link to digital transformation: 74 percent worldwide (76 percent ROI and 60 percent NI) say their organisations’ digital and ESG strategic investments are inextricably linked. With CEOs increasingly accountable to their supply chains and reporting to broader stakeholders, their success is dependent on their digital systems. Where does the business source its raw materials? Do they know their suppliers’ human-rights records? Multinational organisations need to focus more broadly on ESG — and into all the shadows cast by the organisation.
Spanish financial services group Bankinter CEO Maria Dolores Dancausa believes it’s the financial sector’s responsibility to help facilitate positive and sustainable transformation, saying, “we should walk hand-in-hand with companies that are transforming toward more decarbonised business models and play a role that goes far beyond merely financing green sectors. These transitions give banks a wider range of opportunities from the possibility of funding projects that accelerate this dynamic toward net zero, to marketing investment products based on these types of assets.”
Source: KPMG Ireland