Despite business leaders facing a multitude of issues and challenges, ESG and broader sustainability strategy have made their way to the top of board agendas in 2024, according to new research from KPMG International.
Chief sustainability officers from some of the world’s largest companies were interviewed for KPMG’s global survey on ESG governance and organisation to gain a deeper understanding of how companies are structuring their set-up and teams for sustainability and responding to a wave of new regulation and increased stakeholder and investor pressure for transparency on ESG.
Almost all respondents reported high ambitions for ESG in their organisations with half now viewing sustainability as a strategic issue that is embedded in core business operations. With ESG covering a wide area of societal and governance issues, the challenge for many businesses can be deciding what to prioritise. For many respondents, decarbonisation and the race to net zero was the topic most-often included in their corporate ESG strategy – with diversity, equality and inclusion, and human rights in the value chain the next most-mentioned theme.
“Sustainability is growing in strategic importance for companies with increasing reporting requirements on environmental, social and governance (ESG) as well as other demands on organisations regarding sustainability,” says Nadine-Lan Hönighaus, global ESG governance lead at KPMG International.
“This creates challenges for the group sustainability units within organisations charged with ESG work. On one hand, such units must produce more material than they did 10 years ago while strategically developing and implementing work on a wide range of topics from climate to human rights.
“On the other hand, the framework conditions for this work have become much more complex and the standards for implementation, reporting, mandatory auditing and governance requirements increasingly require a robust approach.
“KPMG’s research highlights that companies should start developing a clear analysis of the characteristics, strengths and weaknesses of their existing sustainability-focused organisation and how effectively it supports their ESG strategy, performance and reporting.”
Who leads on ESG?
With ESG recognised by boards as a key issue, there is evidence of companies finding their feet on who makes the decisions on future strategy and the structures needed to measure, implement, and report effectively.
About one-quarter of the organisations covered by KPMG’s research said they have a board level sustainability committee. A further fifth discuss it through committees that cover other topics, most commonly the audit committee. There was also evidence that ESG is a topic making its way into committees typically focused on management, innovation, remuneration and safety and culture.
The question now facing many business leaders is who should make the ultimate decision on ESG as it increasingly becomes embedded in the fabric and purpose of a company.
The CEO is responsible for sustainability in almost half of organisations surveyed, with a dedicated chief sustainability officer as the second most-popular option.
The remaining respondents revealed a wide variety of roles taking charge of ESG – from head of supply chain and manufacturing, to the chief risk officer.
Responding to rising regulation
Reporting on ESG has generally been a voluntary exercise, but some jurisdictions are in the process of making it compulsory – most significantly the European Union through its Corporate Sustainability Reporting Directive (CSRD). Nearly half of the organisations in this research plan to report in accordance with CSRD for their 2024 financial year, with nearly a fifth more planning to do so a year later.
Nearly three-quarters of organisations in this research have six or fewer full time equivalent staff working on non-financial reporting, and more than half have three or fewer. Just over half said they expect to see an increase in this number, with most of the rest expecting numbers to stay about the same.
Group sustainability units take sole responsibility for ESG reporting at more than half of the organisations in this research. It is shared between several department at a further quarter with written responses suggesting that most involve both sustainability and finance with some also including communications.
Most of the rest make finance and accounting solely responsible, except for one where a communications and government affairs department runs reporting with an ESG unit in the finance group responsible for data quality.
Just under half of the organisations in this research have ESG topics in their core corporate key performance indicators (KPIs), with more than a quarter more including them in management level performance reviews. Some respondents say that their organisations plan to increase such work, with one mentioning that they currently have a single indicator on carbon dioxide emissions intensity but plan to add more.
Almost half of organisations interviewed produce internal indicators on a quarterly basis and several use monthly reporting for some measures. Annual is the most common frequency for external reporting used by more than three-quarters of organisations with the remaining respondents doing so quarterly.
ESG key performance indicators are used in calculating executive pay in the majority of the organisations in this research with just over half using these for short-term incentives and two-fifths for long-term incentives. Just under half have between 16% and 25% of variable executive pay linked to ESG indicators.
Looking to the future of ESG
Sustainability professionals see their task becoming more and more a part of everyone’s job in the future. Some see the central function becoming smaller as individual business units take up work, while others believe that finance is likely to take over reporting on sustainability given its increasing importance.
The result of these two trends is that group sustainability units need to become more strategic in outlook so they can provide oversight and guidance across the business and to the board.
John McCalla-Leacy, global head of ESG, says: “Businesses have the opportunity to embed robust ESG and suitability governance by ensuring effective connectivity between functions – from finance to internal operations and supply chains – which can both help to enable compliance with reporting requirements and the identification of sustainable value creation opportunities through enhanced operational transparency and data-driven insights. As one respondent put it in this survey- ‘if we want to exist as a company in 10 or 20 years from now, we need to transform’.”
Gustav von Bratt, governance lead for ESG at KPMG in Southern Africa, adds: “In South Africa, the concept of governance has been traditionally well-defined through the King IVTM Code on Corporate Governance. However, a recent emphasis on ESG mandates and international developments has propelled this topic into the spotlight. Investors, shareholders, and stakeholders now insist on increased transparency and accountability concerning ESG performance, and also for boards and management to take clear and direct responsibility.
“While South African companies are urged to concentrate on climate action, social equity, corporate responsibility, technology, innovation, and stakeholder engagement ESG governance is viewed as fundamental in determining how companies strategically prioritise, monitor, and report on their performance going forward. Integrating ESG governance into corporate practices is crucial for South African companies to foster long-term resilience, stakeholder trust, and sustainable growth in this evolving global landscape.”