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Nearly half of US large business leaders report improved financial performance with ESG

© Shutterstock / Panchenko VladimirPost Thumbnail

KPMG US surveyed large business leaders and found that 43% report improved financial performance through their engagement with ESG.

  • ESG is delivering financial results today but expect greater benefits in the next three to five years.
  • In the face of increasing operational risks due to climate change and environmental degradation in the coming decade, companies are facing more pressure from stakeholders and governments to incorporate ESG strategy.
  • Although organisations have scaled up ESG efforts, only a quarter of companies feel ‘very confident’ in meeting ESG reporting requirements, indicating that more action is needed. 

Amidst uncertainty due to the anticipation of new corporate climate disclosure guidelines from the US Securities and Exchange Commission, the ‘KPMG U.S. ESG Survey’ studied the performance of 200 US business leaders working on Environmental, Social and Governance (ESG)  strategies at companies with more than $1 billion revenue across multiple industries. 

While several benefits are already being realised, others are expected to deliver major financial value over the next 2-5 years. A few that are adding major value now and expected to add major financial value over the next 2-5 years respectively include attracting new customers (26% to 40%), revenue from premium pricing (25% to 37%), and risk mitigation (33% to 41%) to respondents. Its interesting to note that 43% of largest firms (more than 10,000 employees) are more likely to say ESG improves financial performance than reduces it (6%).

US companies are scaling up ESG engagement with financial returns

The survey found that business leaders are optimistic about the impact on financial return of ESG strategies today and in the future. 

Despite economic uncertainty, 55% of business leaders reported that their organisation had scaled up their ESG efforts this year, and nearly half consider their business and ESG goals more closely aligned than five years ago. 

They also described a range of ESG-driven financial benefits, primarily increased efficacy in Mergers and Acquisitions (M&A) reported by 41% of companies,  access to new capital (35%), tax benefits and customer loyalty (34%).

Major additional benefits are also expected in the next two to five years, including attracting new customers (26% to 40%), revenue from premium pricing  (25% to 37%) and improving resilience to a range of risks (33% to 41%). This reinforces the findings of KMPG CEO Outlook report in 2022 which revealed that 70% of US CEOs studied indicated that ESG had made a positive impact on financial performance. 

Rob Fisher, KMPG US ESG leader, said: “These results underscore that ESG provides businesses with a clear opportunity to differentiate themselves and gain a competitive edge. We found businesses see many levers by which ESG can drive financial value, but that also drives complexity for organizing a cohesive, well-understood strategy that can overcome some very real challenges businesses are facing today.”

This can serve to ease business concerns about financial risks associated with ESG engagement. This finding follows Morningstar’s latest report How Do ESG Funds Perform?  in 2023, that examined the performance of almost 8000 ESG funds domiciled in Europe and found that is no performance trade-off over the medium and long-term.

Companies are also prioritising communication regarding this, with 75%  communicating ESG efforts internally to employees and externally to partners, investors and customers. 

Stakeholders demand ESG transparency

The investment in ESG strategies is being driven from stakeholders across sectors. According to the survey, leaders report they are facing the most demand to be transparent about their ESG strategies from their supply chain stakeholders, termed the ‘tip of the spear’, with nearly 90% of businesses reporting ‘some pressure’. 

In addition, they are also facing mounting pressure from employees (82%), institutional investors (81%), customers (81%) and regulators (80%). 

“While business leaders continue to report significant demands from customers, talent, regulators and investors to engage on ESG, engagement varies as businesses try to balance short- and long-term pressures and other competing priorities, creating a real opportunity for differentiation,” said Fisher.

ESG has also been shown to be crucial in investor and business relations, shaping deal outcomes and price adjustments.  KPMG’s recent ESG Due Diligence Survey published in July 2023 found that almost 60% of investors indicated that a deal had been cancelled due to a material ESG finding. Moreover 74% of 200 M&A actors in the US also identified ESG considerations as part of their M&A agenda. 64% of business leaders surveyed in a global survey earlier in 2023 also identified ESG risks as being among the top two most impactful risks for their organisations. 

However, businesses have been shown to not trust competitor ESG claims, indicating that more robust and transparent disclosure frameworks may be called for. A 2023 report Accelerating sustainable action through IoT  surveyed more than 1000 senior technology and ESG professionals and revealed that 80% of respondents believed their competitors are more focussed on perception than achieving tangible sustainability outcomes. 

ESG engagement can play out in different ways

The companies have adopted a range of practices in ESG engagement. These include incorporating innovations and technologies to reduce environmental impact (57%); adopting comprehensive environmental and sustainability practices (56%); scaling up on environmental and sustainability efforts in preparation for enhanced reporting demands/requirements (51%); creating senior positions to drive ESG goals (33%); making investments in sustainability reporting technology (30%); purchasing renewable energy or starting to provide more climate friendly products or services (35%); only doing the minimum to comply with government regulations (28%) or lowest at 18% of respondents, only responding to pressure from stakeholders – which includes both investors and customers.

While the report found that some ‘ESG Leaders’ transformed their organisations through ESG-focused leadership roles, technologies and product strategies such as investments in renewables (35%) and sustainability reporting technology, over half of companies were ‘ESG Pace-Keepers’, investing significantly in scaling up environmental and sustainability practices, especially in response to enhanced reporting requirements. Finally, compliance focussed companies are focussing on meeting the minimum requirements according to government regulations, now subject to change. 

Linking ESG deliverables with executive pay is also gaining traction as a structured internal incentive. It is shown to be underutilised, however, as new analysis from Planet Tracker has found that nearly half of leading plastic companies globally have failed to link performance incentive to ESG goals. 

Barriers to ESG implementation

Businesses are grappling with a range of challenges in implementing ESG strategies and meeting reporting requirements. According to the KPMG report, the main hurdles facing US business leaders are time constraints (51%) and regulatory uncertainty (44%).

Other barriers include distraction due other more pressing business matters (40%), failure to attract or retain top talent (40%) and a perception of falling behind competitors (39%) as well.

There is also uncertainty around the direction of travel for disclosure rules. The US SEC proposed rule changes to corporate climate disclosures in March 2022, which yet to be finalised and published.

Of the companies studied, 92% were headquartered in the US, while 67 % will report in three or four jurisdictions. The report found that almost half of these companies have stopped or slowed down ESG reporting in 2023 as they await the final rules on climate-related reporting.  Previous research has also found however that many companies are going ahead with compliance and prioritising ESG reporting without waiting for the SEC ruling. 

KPMG US found that only 53% of companies are somewhat confident in meeting ESG requirements, and only one in four  feel ‘very confident’ in meeting future ESG reporting requirements across the U.S., EU, and other international jurisdictions.

The US manufacturing and energy sectors are more positive, with 82% of US business leaders in the industry stating confidence in meeting the new disclosure requirements, according to Honeywell’s Environmental Sustainability Index.  

Fisher emphasised that the upcoming reporting requirements should ignite urgent action to align one’s reporting with strategy, and said: “Businesses that recognize they need to make investments today will be in a better position to capitalize on those investments, attracting new investors and customers while improving their resilience over the long term.”

SGV Take 

As businesses face increasing pressure to transition to net zero and incorporate ESG policies across their value chain, the news that ESG engagement drives financial returns and boosts business relations with a range of stakeholders is welcome incentive to boost further engagement. 

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