ESG: Businesses realize the rewards of a robust social program

by Zoe Thompson, Social Strategy Leader, KPMG ESG

This article first appeared in Fair360

The past few years have heralded several Environmental, Social, and Governance (ESG) milestones. In fact, last year, our survey of U.S. CEOs revealed that 70% of CEOs connect ESG to improved financial performance. Additionally, the vast majority of S&P 500 companies use ESG-based incentive compensation goals, growing from 66% in 2020 to 73% in 2021¹. Most commonly the use of diversity, equity and inclusion (DEI) related goals, which rose from 35% in 2020 to 51% in 2021². In tandem with heightened expectations from investors and suppliers along with potential new reporting requirements coming out of the SEC, companies are rightfully focused on executing a strong ESG strategy.

A strong social responsibility program is an integral component of ESG strategy. Social responsibility spans DEI; environmental justice; human rights; housing equity; supplier diversity; health equity; employee wellness initiatives; responsible investing and more, including areas that intersect with environmental issues, such as a just (fair and inclusive) low-carbon transition and the impact on people globally.

This scope is large, but its focus is anchored by social responsibility enhancing financial value. A business can gain a strategic competitive edge.

For example, employers continue to face a structurally tight labor market, competing aggressively for talent. KPMG research has found that 72% American workers say that it is important for their organization to respond to ESG issues, and more than 70% say the mission and purpose of their organization make them feel their job is important.

Likewise, with costs rising, companies are working to deepen their connection with customers. A recent KPMG analysis found that 37% of respondents say that environmental sustainability is important for purchase decisions, and 33% say that social responsibility is an important factor.

Most importantly, more inclusive organizations – those that help their talent, partners and communities overcome barriers to opportunity – drive innovation through diversity. Research has found diverse teams are better decision-makers and problem-solvers, and are more innovative, even in a downturn³.

This is compelling especially today as companies navigate a challenging economy. In fact, while CEOs see a connection between ESG and financial value, 59% also indicated that they would pause or reconsider their organization’s ESG efforts to prepare for an anticipated recession.

Reducing investments in social responsibility, and ESG more broadly, may lead to a mix of near- and longer-term risks, such as financial loss, higher financing costs, recruitment challenges, brand erosion and regulatory noncompliance.

This is a moment that requires decisiveness in balancing short- and long-term returns. Doubling down on ESG may create a competitive advantage in terms of more competitive products and services in the transition to a low-carbon economy, greater ability to attract and retain talent, better ability to attract capital, etc.

At the same time, social responsibility programs are not immune to scrutiny. In fact, while research shows diverse and inclusive teams drive better outcomes and consumers respond favorably to more socially responsible companies, that's different from whether an organization’s social and DEI strategies are delivering against those goals. Action and accountability are paramount.

Building a successful social program

A successful ESG journey typically involves three phases and building a sustainable and successful social responsibility program should follow suit. To lay the foundation, companies should start with understanding their purpose in focusing on social responsibility. Knowing the “why” will help drive focus and direct efforts. They should also look for ways to invest in programs, internally and externally, that have a social impact in the key three areas – workforce, customers and suppliers and communities. With a solid foundation, companies will be in better position to move through these steps:

Build a strategy: Social responsibility should be integrated into the overall ESG and organizational strategies and built into the culture. In practice, social responsibility programs should focus on matters core to their stakeholders to drive financial value. Assess how an organization operates today, how it plans to operate in the future and what tools it needs to get there. The insights uncovered should inform the strategy and execution plan. Importantly, this assessment should include competitive benchmarking and horizon scanning to inform a future-ready strategy.
Operationalize: Ensure that the social responsibility strategy is a natural extension of an organization’s mission that seamlessly connects to strategies that provide value to the organization and society. Align philanthropic activities with business strategies and recognize the impact operations have on local communities and populations.
Report and monitor: Tie metrics to business strategy. Time spent, money invested, and people hired are inputs. How does an organization measure inclusion mapped against idea generation, product development, sales and more? How can a DEI assessment improve benefits to drive talent recruitment and retention? Every organization is different and will need to tailor metrics to their strategy.

Leading executives understand that ESG makes business better. They know it needs to be purpose-led and sustainable to deliver the resilience and profitable growth they desire. And they recognize that it can no longer be siloed in functions and divisions—ESG must be something that is embedded into a company’s entire strategy and operations.