ESG and sustainability are gradually gaining prominence across sectors and markets globally. Organisations are starting to see that today's investments might not yield huge returns immediately; however, not investing could already be losing them market share. So, what’s holding organisations back from making progress? A KPMG survey of 150 CEOs across the UK reveals lack of skills is the biggest barrier to advancing their ESG strategy. Their concern is not just limited to understanding what skills are needed to operationalize ESG initiatives but also where to find quality talent with the right skills. While the current talent crisis for ESG is a long-term challenge, re-evaluating your organisational design (OD) by deploying a skills-based approach can help mitigate it while promoting the integration of ESG into business strategy through skill adjacencies, i.e., areas where existing competencies align with ESG requirements. A skills-based OD for ESG is underpinned by translating the ESG strategy into the outcomes the organisation envisions achieving, the problems they seek to solve, and the value they aspire to create, as opposed to setting up ad hoc committees, teams, and roles decoupled from the business.
At KPMG, based on our in-depth experience helping clients on their ESG journey, we have crystallized our learnings into the following three key design principles.
The ABCs of ESG Organisational Design
A) Align with Ambition
Leaders are increasingly debating their organisation’s approach to the evolving ESG landscape with one key question often taking centre stage: Who makes the decisions on ESG’s future strategy, and what roles are needed to measure, implement, and report effectively? Multiple organisational archetypes exist today and must be evaluated to identify an appropriate place for ESG in the organisation’s hierarchy, depending on their ESG ambitions, ranging from value protection (centred on satisfying regulatory obligations and fulfilling fundamental expectations from investors or consumers) to value creation (focused on driving business opportunities such as achieving top-line growth with more sustainable products).
From positioning ESG roles under the CFO to signal the organisation’s focus on investor expectations, to creating a role under the COO to indicate emphasis on efficiency, to aligning a role under the CEO to fully integrate ESG into the business, organisations are assessing the placement and hierarchy of ESG positions against the significance of ESG to their core purpose and business strategy. Some organisations actively aspire to evolve from value protection to value creation over time, while others may be satisfied with targeted actions for value protection for the foreseeable future. The higher the significance of ESG to the organisation’s success, the closer in the hierarchy ESG positions should be to the C-suite, with an elevated degree of influence to create the necessary impact and evidence a clear alignment between the ESG goals and the organisation’s ambitions.
B) Balance the Broad Vision with a Diffused Focus
An all-encompassing ESG strategy may have diverse elements, and each may necessitate its own unique portfolio of skills. A materiality assessment of your business can help identify hotspots where your business should really invest its efforts. With data-backed evidence on key ESG topics critical to the business agenda, organize each topic’s team around skills to achieve the desired outcomes and assess overlaps if any. For example, should the CSO role focus on all ESG components equally, and if so, what aspect of strategy design, compliance, reporting, and implementation should be centralized within a dedicated function, and what should be dealt with in a decentralized environment sharing responsibilities across functions?
The key is to balance centralized control and consistency with decentralized speed and flexibility, keeping the outcome as the anchor. A centralized non-financial reporting unit may facilitate interdepartmental collaboration through specialists with streamlined processes allowing for optimized resource allocation; however, the same model may limit flexibility for rapid adaptation to change for reporting-related tasks if they differ across areas. For example, both carbon offsetting and climate change form a subset of Environment in ESG, but the risks associated with each, and their differentiated reporting requirements should weigh in on defining the non-financial reporting structure in your organisation.
Ensuring that every aspect of the ESG program is working towards a unified objective is crucial, even though the approach to various ESG programs may vary between different topics, geographies, and even businesses, depending on factors such as standardization of processes and variability in demand from stakeholders.
C) Commence with the Minimum Viable Over the Future State
Organisations are at different stages of maturity when it comes to integrated business practices. With ESG reshaping business operations, performance measurement, and risk management, new challenges alongside opportunities are coming to the forefront. Unlike financial data, which typically resides in a relatively small number of interconnected systems, ESG data may need to be collected from a plethora of disparate systems that haven’t been designed to interact with each other. For example, there could be a standalone system for measuring carbon emissions that doesn’t support social or health and safety metrics. Therefore, a metric such as carbon emissions per headcount or hours worked can’t be determined easily, and the sustainability lead must prioritize implementing rigorous data collection and management systems over launching disparate ESG programs and target setting.
Examining the process taxonomy related to the chosen ESG topic of importance is a good starting point to establish the complexity and scope of each process, which can be extrapolated to determine the skill and resource requirement in the near term while balancing the future requirements.
ESG represents an ongoing journey rather than a fixed destination. It demands perpetual learning and enhancement. Therefore, rather than fixating on the endpoint or attempting to tackle every aspect simultaneously, prioritizing a select few areas can empower organisations to build momentum with their ESG initiatives.
An effective OD that facilitates the accomplishment of an organisation’s ESG agenda will benefit from its ability to:
- Establish meaningful engagement with diverse groups of stakeholders.
- Foster a culture of innovation and continuous improvement.
- Demonstrate the organisation’s ability to comply with regulations while minimizing ESG-related risks to the business.
Please reach out to Mel Newton and Divya Thareja for further information.
