Hironori Kamezawa quote

Stepping up on social issues

Over the past 18 months, the world has not only got faster as digital acceleration took hold, it has also become more divisive and fractious. In major economies, social tensions are on the rise. CEOs are cognizant of this public mood and the research shows they are ready embrace the role that companies can play in driving total shareholder return and total societal return.

Today, we see a major focus on the social aspect of environmental, social and governance (ESG), with 81 percent of CEOs saying, “Our response to the pandemic has caused our focus to shift toward the social component of our ESG program.”

But the research also found a profound tension between the accountability that CEOs feel they have for driving progress on the social dimension of ESG and their ability to meet expectations in the critical area of diversity. On the one hand, 71 percent of CEOs said they will be increasingly held personally responsible for driving progress in addressing social issues. But on the other hand, over half (56 percent) admitted that with public, investor and government expectations of inclusion, diversity and equity (IDE) rising so fast, they may struggle to meet expectations.

Driving progress on IDE within organizations will likely require action in two areas. First, CEOs will need to actively listen to employees to understand what aspects of IDE are important to them. Secondly, they will then need to set clear and measurable targets to achieve progress against those priorities.

Collaborating to power sustainability

Action to limit climate change and reduce carbon emissions in the race to net zero has never been more important. The latest analysis from the UN’s Intergovernmental Panel on Climate Change (IPCC) — released in August 2021 — amounted to a “code red for humanity”, predicting that global warming will hit 1.5°C by 2040.

Making progress on addressing sustainability issues, including climate change and the decarbonization of the economy, will require strong collaboration between business and government. CEOs are planning to devote significant capital to becoming more sustainable, with 30 percent planning to invest more than 10 percent of revenues in their efforts.

But at the same time, they also stress that progress on sustainability and climate change requires equally strong government commitment.

Government role in climate change illustration

Connecting ESG strategy with financial returns

The public is demanding more ambitious ESG goals — but have CEOs taken the necessary steps to bring them to life? Today’s connected CEOs are those that can deliver on a trusted purpose by responding to increased societal expectations while driving sustainable business performance through digital innovation. Neither can be done in a vacuum, as three-quarters (75 percent) of global CEOs say that their digital and ESG investments are inextricably linked. As CEOs plan to devote significant capital to becoming more sustainable, it’s important their digital investments are plugged into their ESG needs.

But while CEOs believe that social and environmental priorities are key, they’re less convinced about making the connection between ESG programs and hard results. The research shows that more needs to be done to connect ESG strategy with financial returns. While 52 percent of CEOs at high-growth organizations (those who see earnings growth exceeding 5 percent per annum over the next 3 years) believe that their ESG programs will improve financial performance, this drops to 37 percent across the wider sample of CEOs. Close to a quarter (24 percent) of CEOs say ESG programs may reduce financial performance.

CEOs feel their organizations are struggling to report on and communicate ESG performance in a way that matters to key stakeholders, such as investors. When we asked CEOs to identify the one critical challenge that was undermining their ability to communicate ESG performance to key stakeholders, the standout challenge (selected by 42 percent of respondents) was that they “struggle to tell a compelling ESG story”.

Getting this right is critical, as investor scrutiny of companies’ ESG performance is intensifying: 58 percent of CEOs are seeing increased demands from stakeholders — such as investors, regulators and customers — for increased reporting and transparency on ESG issues.

Unless otherwise indicated, throughout this report, “we”, “KPMG”, “us” and “our” refer to the network of independent member firms operating under the KPMG name and affiliated with KPMG International or to one or more of these firms or to KPMG International.