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Navigating ESG Landscape: A review of KPMG’s research report
“ESG in governance” refers to the integration of environmental, social, and governance factors into governance practices within organizations. ESG governance encompasses the policies, processes, and structures through which companies manage and oversee their environmental, social, and governance responsibilities. It emphasizes the integration of sustainability considerations into decision-making processes at all levels of the organization, aligning with broader corporate governance principles.
This report is based on in-depth interviews conducted by the KPMG International research team, comprising professionals from the UK, Germany, Korea, and the US. The team has interviewed 50 sustainability executives. Interviewees include senior executives in ESG function from across a range of sectors from Belgium, Brazil, Canada, France, Germany, Ireland, Sri Lanka, Switzerland, The Netherlands and the United Kingdom.
The main findings are as follows:Sustainability has arrived at the top of corporate structures. It is a board-level responsibility, led by chief executive officers in almost half of the corporates in this research. Almost all have made it a strategic issue or adopted a purpose-driven approach.
Sustainability-focused organizations are still developing in maturity, with changes continuing to take place. Even the most advanced corporates are having to adapt to increasing ESG reporting requirements, such as the European Union’s (EU) Corporate Sustainability Reporting Directive (CSRD).
Group sustainability units can adapt to ESG’s increasing importance by taking a more strategic approach, working with other departments and no longer trying to do everything connected with sustainability themselves.
Group sustainability units vary widely in structure, with some primarily functional and others more agile in their operations.
Just under half of the corporates in this research discuss ESG through either a dedicated board-level sustainability committee or another specific committee, such as audit.
Some heads of sustainability feel vulnerable alongside other departments that covet their increasingly high-status work. Group sustainability units usually lead on setting, monitoring and implementing ESG strategy and reporting. However, finance and accounting departments are becoming more involved in ESG reporting, with some taking some or all responsibility for the work.
Despite its increasing importance, the corporates in this research tend to have relatively small teams working on non-financial reporting with just over half having three or fewer full-time equivalent staff.
The research finds that key performance indicators based on sustainability are mostly externally reported on an annual basis, although many corporates track them quarterly for internal purposes.
Just under half of the corporates in this research link between 16 and 25 percent of variable executive pay to sustainability indicators.
These highlight a widespread acknowledgment among corporate stakeholders regarding the importance of Environmental, Social, and Governance (ESG) considerations. However, there are several areas of critique and areas for further exploration:
Top-Level Responsibility and Strategic Focus: The fact that almost half of the corporates surveyed have their board-level responsibility led by chief executive officers demonstrates a positive trend towards recognizing the importance of sustainability at the highest levels of corporate governance. However, while it’s commendable that almost all of them have made sustainability a strategic issue or adopted a purpose-driven approach, the efficacy of these approaches in driving meaningful change remains to be seen. Mere adoption of strategic language does not always translate into tangible action.
Maturity of Sustainability-Focused Organizations:The acknowledgment that sustainability-focused organizations are still developing in maturity indicates an ongoing evolution within the corporate landscape. However, it would be beneficial for the report to examine deeper into the specific challenges and opportunities faced by these organizations in their journey towards maturity. Understanding these factors could provide valuable insights for both practitioners and policymakers.
Adaptation to ESG Reporting Requirements:The mention of corporates, even the most advanced ones, having to adapt to increasing ESG reporting requirements, such as the EU’s Corporate Sustainability Reporting Directive, highlights the evolving regulatory landscape. However, it would be insightful to explore the specific strategies adopted by these corporates to navigate these regulatory changes effectively, as well as any associated challenges they encounter.
Strategic Approach of Group Sustainability Units:The recommendation for group sustainability units to take a more strategic approach and collaborate with other departments reflects a holistic understanding of sustainability integration within organizational structures. However, the report could provide more concrete examples of successful collaboration models and best practices to guide other organizations in similar endeavours.
Variability in Group Sustainability Unit Structures:The acknowledgment of variability in the structures of group sustainability units underscores the diverse approaches adopted by corporates in managing sustainability-related functions. However, it would be beneficial for the report to analyze the strengths and weaknesses of different structural models and their implications for organizational performance and resilience.
Board-Level Oversight of ESG:The finding that just under half of the corporates discuss ESG through either a dedicated board-level sustainability committee or another specific committee indicates a mixed approach to governance oversight. It would be interesting to explore the effectiveness of different oversight mechanisms in driving sustainable business practices and stakeholder value creation.
Vulnerability of Heads of Sustainability:The vulnerability felt by heads of sustainability alongside other departments highlights potential tensions within organizations regarding the ownership and management of sustainability initiatives. Further examination of these tensions and potential strategies for mitigating them could provide valuable insights for organizational leaders seeking to foster a more collaborative and inclusive approach to sustainability governance.
Role of Group Sustainability Units in Strategy and Reporting:The central role played by group sustainability units in setting, monitoring, and implementing ESG strategy and reporting underscores their importance within organizational structures. However, the increasing involvement of finance and accounting departments in ESG reporting raises questions about the delineation of responsibilities and potential overlaps or conflicts of interest.
Resource Constraints in Non-Financial Reporting Teams:The revelation that the corporates tend to have relatively small teams working on non-financial reporting highlights potential resource constraints in this critical area. It would be valuable for the report to explore the implications of these resource constraints for data quality, reporting accuracy, and overall organizational sustainability performance.
Linkage of Executive Pay to Sustainability Indicators:The finding that just under half of the corporates link between 16 and 25 percent of variable executive pay to sustainability indicators indicates a growing recognition of the importance of aligning executive incentives with sustainable business practices. However, the report could investigate deeper into the specific sustainability indicators used for performance evaluation and the associated impact on organizational behaviour and decision-making processes.
The research finding that decarbonising business models and reducing greenhouse gas emissions are the most frequently included topics in ESG strategies among almost all respondents is indeed significant. However, there are several aspects of this finding that warrant further scrutiny and critique.
While it’s informative to know that decarbonization and emissions reduction are prevalent in ESG strategies, the report could benefit from providing more specific details about the strategies being employed by these corporates. It’s essential to assess whether these corporates are merely paying lip service to decarbonization or if they have robust and ambitious plans in place to achieve meaningful emissions reductions. Without this information, it’s challenging to evaluate the effectiveness and impact of their sustainability initiatives. Understanding the relative prioritization and integration of various ESG topics would provide a more nuanced understanding of corporate sustainability efforts.
In conclusion, while the outlined steps provide a comprehensive framework for enhancing sustainability-focused organizations within corporates, it is essential for corporates to tailor these steps to their specific contexts, priorities, and challenges. Continuous monitoring, evaluation, and adaptation are key to ensuring the effectiveness and sustainability of sustainability initiatives in driving long-term value creation. Also, while the findings presented in the research report provide valuable insights into the current state of ESG integration within corporate governance structures, there are opportunities for further analysis and exploration to enhance our understanding of best practices, challenges, and emerging trends in this rapidly evolving field.
(The writer, a senior Chartered Accountant and professional banker, is Professor at SLIIT University, Malabe. He is also the author of the “Doing Social Research and Publishing Results”, a Springer publication (Singapore), and “Samaja Gaveshakaya (in Sinhala). The views and opinions expressed in this article are solely those of the author and do not necessarily reflect the official policy or position of the institution he works for. He can be contacted at saliya.a@slit.lk and www.researcher.com)