Great ESG expectations

Accelerating ESG's impact

Global CEOs see the importance of environmental, social and governance (ESG) initiatives on their businesses, especially when questioned about ESG’s impact on improving financial performance, driving growth and meeting stakeholder expectations. And this year’s survey shows a marked jump in demand from stakeholders — such as customers and investors — for increased transparency.

CEOs increasingly agree that ESG programs improve financial performance, sitting at 45 percent, an increase from 37 percent one year ago. When asked where CEOs see corporate purpose having the greatest impact over the next 3 years, driving financial performance is in the top spot with 73 percent. CEOs increasingly understand that businesses embracing ESG are best able to secure talent, strengthen employee value proposition (EVP), attract loyal customers and raise capital. ESG has gone from a nice-to-have to integral to long-term financial success.

• 69 percent see stakeholder demand for increased reporting and transparency on ESG issues up a significant extent (up from 58 percent in August 2021)
• 72 percent of CEOs believe stakeholder scrutiny on ESG will continue to accelerate (up from 62 percent in August 2021)
• 17 percent of CEOs indicate stakeholder skepticism around greenwashing is increasing (up from 8 percent in August 2021)

Changing regulations and other pressing global economic matters are CEOs’ biggest challenges in delivering their ESG strategies. CEOs are also increasingly aware there is a lack of an accepted global framework for measuring and disclosing ESG performance (14 percent, up from 7 percent in August 2021). While regulation concerns remain high, this may highlight how global governments and regulators need to work together to align around ESG requirements.

• Investments are forthcoming: Sixty-two percent of CEOs say they will be looking to invest at least 6 percent of revenue in programs that enable their organization to become more sustainable. 
• Key drivers: Global CEOs find it difficult to pick just one key driver when it comes to accelerating their companies’ ESG strategies: proactivity on social issues (34 percent), more transparency (26 percent), inclusion, diversity and equity (IDE) strategy (21 percent) and net-zero strategy (19 percent). This shows there’s a growing consensus that they all matter.
• Articulating their story: The biggest challenge for CEOs’ in communicating their ESG performance to stakeholders is the struggle to articulate a compelling ESG story, which more than one-third (38 percent) of CEOs say their organizations face.

A likely recession’s impact on ESG

As CEOs strive to maintain optimism and take steps to insulate their businesses from an upcoming recession, indicators point to ESG progress suffering as a result, following the trend of CEOs reassessing initiatives in many areas of the business (e.g. transformation and staffing). Our survey shows recession-proofing businesses may come at the expense of furthering ESG efforts. As economic uncertainty continues, 50 percent are pausing or reconsidering their existing or planned ESG efforts over the next 6 months, and 34 percent have already done so.

ESG has become an intrinsic business imperative. Delaying key ESG efforts could make businesses more reactive in the future rather than help them lead the way with greater transparency, resilience and sustainability.

The ESG shadow cast by the supply chain

It’s critical for CEOs to understand how sustainable their entire business really is. CEOs increasingly see reporting and transparency as important to their ESG goals — and this includes insight into their broader supply chain. Our survey shows that nearly half of CEOs (47 percent) plan to diversify their supply chains in the next 6 months in response to geopolitical challenges. What’s more, the number one strategy CEOs are considering to mitigate supply chain issues is to monitor deeper into their supply chain (i.e. at the third and fourth levels) to better anticipate problems. Why? Because the environmental, sustainability and human-rights practices of their partners and suppliers may impact their business and reputation.

Among the many challenges, decarbonizing the supply chain is a significant hurdle for companies looking to achieve net zero. Global supply chain leaders are starting to double down on investing in technology — including real-time, end-to-end analytics — to improve visibility across the entire value chain. They will likely have a more accurate understanding of how products and materials flow through the network and where issues are in the supply chain so they can move from mere strategic intent to real tangible outcomes.

CEOs are also making the link to digital transformation: 74 percent say their organizations’ digital and ESG strategic investments are inextricably linked. With CEOs increasingly accountable to their supply chains and reporting to broader stakeholders, their success is dependent on their digital systems. Where does the business source their raw materials? Do they know their suppliers’ human-rights records? Multinational organizations need to focus more broadly on ESG — and into all the shadows cast by the organization.

Bankinter CEO María Dolores Dancausa believes it’s the financial sector’s responsibility to help facilitate positive and sustainable transformation. “The financial sector should walk hand-in-hand with companies that are transforming toward more decarbonized business models, and play a role that goes far beyond merely financing the greenest sectors.” She argues that these transitions give banks a wider range of opportunities, “from the possibility of funding projects that accelerate this dynamic to marketing investment products based on these types of assets.”

Diversity ramping up progress

Global businesses are seeing major focus put on the social aspect of ESG. While there’s broad alignment on IDE, there is growing concern around the pace of progress. Sixty-eight percent of CEOs believe that progress on IDE has moved too slowly in the business world (up from 52 percent in February 2022), and 73 percent believe scrutiny of IDE performance will continue to increase over the next 3 years.

Awareness is key, and CEOs can play a powerful role in helping lead and drive the IDE agenda in the years ahead. Moving forward, it’s important to normalize IDE within companies to avoid fatigue. Any plans need to be intentional and focused on what’s possible within their market and business.

Diverse teams are also higher performing — but often only in environments of psychological safety. Seventy-seven percent of CEOs say they have a responsibility to drive greater social mobility in their organizations, which involves how you invite everyone into and structure your organization. It requires that businesses invest in their people in a new way.

For Bill McDermott, CEO of ServiceNow, ensuring that corporate purpose is both an effective and symbiotic method for business growth means making sure employees’ personal values align with those of the company. “You must focus on recruiting properly to make sure there is a great match with the individual values of a person coming into your culture. Having that match also impacts diversity, equity and inclusion.”

Exploring opportunities for growth

• Recognize ESG’s impact on financial performance: ESG has become integral to long-term financial success. CEOs increasingly agree that ESG programs improve financial performance, which includes being able to secure talent, strengthen employee value proposition, attract loyal customers and raise capital.
• Invest in real-time technologies: CEOs should monitor deeper into their supply chain (i.e. at the third and fourth levels). Global supply chain leaders are starting to double down on investing in technology — including real-time, end-to-end analytics — to identify where issues exist and improve visibility across the entire value chain.
• Take the lead on IDE: CEOs can play a powerful role in helping lead and drive the IDE agenda in the years ahead. It's important to normalize and create a culture of IDE across the organization to attract and retain new employees.
• Build strong connections among functions: Resilient organizations have well-connected internal teams, so for example, the finance function is aware of what the ESG teams are doing.