KPMG U.S. ESG and Financial Value Survey

Business leaders report ESG engagement is delivering financial value across M&A, customer engagement, and investor relations and they expect that to increase in the next three to five years. However, leaders also report their companies are taking diverging approaches with some leading, most keeping pace, and others focusing solely on compliance, according to a new survey from KPMG LLP, the U.S. audit, tax, and advisory firm.

Behind this effort to connect ESG to financial value, leaders report that they are feeling the most pressure to be transparent about their ESG strategies from their supply chain stakeholders in addition to mounting pressure from investors, customers, and government regulators. And while more than half are at least somewhat confident in meeting U.S. reporting requirements, internal barriers to strategy execution remain.

• Business leaders report ESG is delivering financial results today but expect greater benefits in the next 3-5 years.
  
• More business leaders – especially those at larger companies – believe ESG improves financial performance than reduces it with significant financial benefits being realized today in M&A efficacy (41%), access to new capital (35%), and customer loyalty (34%) at the top of the list.
  
• While several benefits are already being realized today, 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.
  • Note, that 43% of largest firms (more than 10,000 employees) are more likely to say ESG improves financial performance than reduces it (6%).
• Companies are taking varying approaches in driving their ESG strategy. While most are acting in some form, some have created senior positions to drive ESG goals (33%), made investments in sustainability reporting technology (30%), and purchased renewable energy (34%); one-quarter indicated they are doing the minimum required to comply with government regulations.
  
• All companies are feeling pressure from stakeholders, but supply chain partners are the new tip of the spear. Nearly 90% of businesses say they are feeling at least some pressure from supply chain partners to engage on ESG, while more than 80% report some pressure from employees (82%), institutional investors (81%), customers (81%) and regulators (80%).
  
• Execution of ESG strategy and reporting faces real hurdles but most are at least somewhat confident they can meet requirements. Time constraints (51%) and regulatory uncertainty (44%) are keeping business leaders up at night the most, however, most believe they can meet upcoming reporting requirements in the United States. Of note, almost half (46%) of companies have slowed down or stopped ESG reporting as they await the U.S. Securities and Exchange Commission’s final rule on climate-related reporting. Only a quarter of companies feel “very confident” meeting future ESG reporting requirements across the U.S., EU, and other international jurisdictions.
• Two-thirds of business leaders have already begun to dive into generative AI (Gen AI) to deliver on ESG, but getting the underlying data organized will be essential. At this stage, most leaders (52%) expect Gen AI to help them achieve ESG goals by optimizing operational efficiencies and reducing waste. While 49% believe it will play either an important (31%) or transformational (18%) role in reaching ESG goals, 46% think it’s still too early to tell.

ESG Presents a Differentiating Opportunity as Companies Balance Competing Priorities

“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.

The 2022 KPMG CEO Outlook found that despite 70% of U.S. CEOs indicating that ESG had made a positive impact on financial performance, 59% indicated they were pausing or reconsidering their organization’s ESG efforts in light of economic uncertainty. However, the KPMG study released today found that 55% of business leaders ultimately scaled up their ESG efforts within their organizations this year, despite economic uncertainty, while 26% scaled back.

M&A Spotlight

This latest survey further underscored the importance of ESG to M&A efficacy with 41% believing it has significant financial value today. This echoes KPMG’s recent ESG Due Diligence Survey, which found that material findings from ESG due diligence led to deal cancellations and price reductions, with 59% of the corporate investors indicating that a deal of theirs had been canceled due to a material ESG finding.

Self-Reinforcing Risks Demand a Clear Strategy

Many of the risks cited in this survey can become self-reinforcing posing a near-term risk with longer-term consequences. For example, the top barriers cited to achieving one’s ESG strategy include distraction due to other more pressing business matters (40%), failure to attract/retain top talent (40%), and a perception of falling behind competitors (39%).

“ESG’s wide-ranging impacts and levers make it an incredibly unique coordination challenge for leaders,” added Fisher. “The risk of falling behind can compound, turning today’s headache into a long-term struggle as competitors pull away. The upcoming reporting requirements should ignite urgency to align one’s reporting with strategy today.”