If you want to find out how ESG is integrated into your organization, just ask: "What do you base your salespeople's bonuses on?" If it is not about sustainable results, but mainly about commerical results, then there is work to be done. ESG goes beyond nicely worded policies, glowing reports, and a sustainable purchasing policy for the cafeteria. ESG needs to be an integral part of your business strategy, not a separate story. And not just a project for the annual audit, but an ongoing process towards a greener, more socially responsible and better governed organization. Where everyone, at every level, is involved and knows what is expected of them.
From strategy to plan
Every organization requires a plan as a starting point for a clearly defined ESG journey. In which all aspects are covered and the biggest hurdles are taken into account. Such a holistic approach to the topics of Environment, Social and Governance will provide guidance. Along the way, many organizations find their focus has been mainly on one component and the whole effort isn’t balanced. For example, putting all your energy into the most sustainable choice in terms of your carbon footprint can result in a lower social score because everything had to give way to the larger sustainability goal.
Transformation in three areas
In essence, every ESG journey should be a transformation journey covering three aspects: the reporting transformation, business transformation and operational transformation. Transformation can start from different angles. For example, a company might begin with a double materiality assessment and improving its reporting processes, which then highlights areas for strategic business changes. But they could also start shaping or upgrading their strategy, which then drives changes in their business, reporting and operations.
Reporting Transformation
The reporting part includes the requirements you must meet, such as CSRD and other ESG reporting regulations. Essentially, it means merging the traditionally separate worlds of financial and non-financial reporting into a clear, coherent reporting approach where all components form a single whole. With more people involved, each with different areas of expertise, ensuring reliable information for financial and other stakeholders becomes a challenge. Ownership is often unclear, data may not be of the right quality, or it's spread across various systems. Training employees and improving communication around ESG reporting are critical steps to making progress. Moreover, don’t forget to implement the right level of risk management, especially regarding the non-financial aspects of this new form of reporting.
Business Transformation
A business transformation has three desired outcomes: preserve and create value, grow the top line, and ensure resilience and future-proofing. The transformation behind this is partly about your sustainability performance, improving aspects such as corporate reputation, brand value and your license to operate. But it's also about discovering new opportunities that stem from these improvements. Risk management is crucial in this area as well. That goes beyond avoiding potential fines by not meeting reporting requirements; it also covers your tax position, reducing environmental damage, addressing scarcity of raw materials, and even avoiding negative publicity and reputational damage. Finally, there are many value creation opportunities. Meeting reporting requirements can make it easier to access capital. Also, you might come across new ideas to develop new products or services. In addition, you may be able to strengthen your market share and even reduce your costs by gaining a better understanding of the processes within your organization.
Operational Transformation
The operational transformation helps knit everything together. This involves providing strong governance and processes to transform your business. This also involves ensuring robust and reliable ESG data for reporting. And – not to forget – providing steering information for sustainability performance improvement and business transformation. This doesn’t happen automatically; you’ll face issues like scattered and/or legacy systems, especially since financial and non-financial information rarely align. There will be data gaps and data of poor quality where information about sustainability isn’t available, not reliable or not up to date. Finaly, all of this makes it difficult to get a clear, reliable audit trail. In short, there is definitely work to be done here as well.
The new Omnibus Package isn’t a free pass to wait around
The EU recently announced that it’ll bundle several ESG requirements into one omnibus package. The goal is to streamline compliance and cut red tape. Naturally, this has raised questions: What exactly should we do? Should we wait for more clarity? Or act now? At KPMG, our view has always been simple: this legislation focuses on issues that companies should already be tackling. Climate risk, resource scarcity, and growing social inequality aren’t issues because we have to report on them, they are issues because they threaten the future. The regulatory landscape, however, is shifting and the extent to which we’ll shift our ESG journey accordingly, may distinguish our organization from its competitors. So, if you’re already reporting, keep going and revisit your scoping exercise to see how the new thresholds might apply. If your reporting obligations are just around the corner, review what has changed and continue your preparations. Pay special attention to no-regret moves: initiatives that will deliver strategic, operational, or financial benefits regardless of the rules. And if your reporting deadline is still a while away? Start preparing. Take what’s useful from the CSRD, and build from there, with an eye towards those same no-regret wins. Bottom line: even if the legal requirements shift, the underlying reality doesn’t. We still need to move towards a more sustainable future at every level.
What will help me on my ESG journey?
As one of our clients put it so well: "Don't hire people to do things for you or apply knowledge for you, but hire those who teach you how to do it yourself. Also, dare to let people from the outside look inside. What do they see? What do they point out? Where are your blind spots? How can you turn their input into internal knowledge and integrate it into your processes?"
It's also important to realize that all ESG-related legislation has both similarities and differences. Break them down and make sure you understand the differences. For example: CSRD is about disclosure, while CSDDD is about action. This kind of insight will help steer your transformation in the right direction.
Finally, talk about it privately, in workshops and at events with peers in similar situations. Learn from each other, find out where they are in their process. What challenges are they facing? What solutions have they found? What questions are they asking? It's also worth looking within your own organization for people who are interested in getting involved, especially at the start of the process. Purpose is more important to employees than ever before. Helping the company they work for to become more sustainable, more social, and better, is a great way for them and the organizations they work for to come closer together.
