Sustainability is growing in strategic importance for companies, with increasing reporting requirements on environmental, social and governance (ESG) as well as other demands on corporate structures regarding sustainability.
This creates challenges for the group sustainability units charged with ESG work. On one hand, such units must produce more material than they did in the past while strategically developing and implementing initiatives across a wide range of topics from climate to human rights.
On the other hand, the framework conditions for this work have become much more complex and the standards for implementation, reporting, mandatory auditing and governance requirements increasingly require a robust approach.
Shareholders and bondholders are also focusing on governance as a guarantee that sustainability commitments will be maintained and delivered over the long term.
To understand this better, KPMG released Anchoring ESG in governance, a new report based on in-depth interviews with 50 chief sustainability officers and managers in Belgium, Brazil, Canada, France, Germany, Ireland, the Netherlands, the UK, Sri Lanka and Switzerland. It examines how group sustainability units operate within corporate structures, what makes them successful and how they plan to develop in the future.
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 organisations 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 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.
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.
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.
Source: Anchoring ESG in governance, KPMG International, 2024
Almost all respondents reported high ambitions for ESG in their organisations, with half now viewing sustainability as a strategic issue that is embedded in core business operations. With ESG covering a wide area of societal and governance issues, the challenge for many businesses can be deciding what to prioritise.
For many respondents, decarbonisation and the race to net zero was the topic most-often included in their corporate ESG strategy, with diversity, equality and inclusion and human rights in the value chain the next most-mentioned theme.
KPMG’s research highlights that companies should start developing a clear analysis of the characteristics, strengths and weaknesses of their existing sustainability-focused organisation and how effectively it supports their ESG strategy, performance and reporting.
Commenting on the findings, Conor Holland, Partner, who leads the ESG reporting and assurance team at KPMG in Ireland, said: “Businesses have the opportunity to embed robust ESG and sustainability governance by ensuring effective connectivity between functions like finance and other functions both in internal operations and supply chains, which can both enable compliance with reporting requirements and the identification of sustainable value creation opportunities through enhanced operational transparency and data-driven insights.”
With ESG recognised by boards as a key issue, there is evidence of companies finding their feet on who makes the decisions on future strategy and the structures needed to measure, implement, and report effectively.
About one-quarter of the organisations interviewed said they have a board level sustainability committee. A further fifth discuss it through committees that cover other topics, most commonly the audit committee. There was also evidence that ESG is a topic making its way into committees typically focused on management, innovation, remuneration and safety and culture.
The question now facing many business leaders is who should make the ultimate decision on ESG as it increasingly becomes embedded in the fabric and purpose of a company. The chief executive officer is responsible for sustainability in almost half of organisations surveyed, with a dedicated chief sustainability officer as the second most-popular option.
Reporting on ESG has generally been a voluntary exercise, but some jurisdictions are in the process of making it compulsory, most significantly the European Union through its Corporate Sustainability Reporting Directive (CSRD).
Nearly half of the organisations in this research plan to report in accordance with CSRD for their 2024 financial year, with nearly a fifth more planning to do so a year later.
Nearly three-quarters of respondents have six or fewer full time equivalent staff working on non-financial reporting, and more than half have three or fewer. Just over half said they expect to see an increase in this number, with most of the rest expecting numbers to stay about the same.
Group sustainability units take sole responsibility for ESG reporting at more than half of the organisations in this research. While just under half of the organisations in this research have ESG topics in their core corporate key performance indicators (KPIs), with more than a quarter more including them in management level performance reviews.
Sustainability professionals see their task becoming more and more a part of everyone’s job in the future. Some see the central function becoming smaller as individual business units take up work, while others believe that finance is likely to take over reporting on sustainability given its increasing importance.
The result of these two trends is that group sustainability units need to become more strategic in outlook so they can provide oversight and guidance across the business and to the board.
