ESG

The acknowledgement among companies that climate change is a risk to the business has improved markedly since 2017, but its growth does not reflect the urgency spelled out by the IPCC’s ‘Code Red’ report in 2021, that called for urgent action to mitigate climate change.

In the past 5 years, the share of G250 companies reporting on environmental issues as a risk to the business has increased from 48 percent in 2017 to 64 percent in 2022, and the N100 from 28 percent to 46 percent.

Only 13 percent of the G250 adopt a leading practice of modeling the potential impacts of climate change using scenario analysis. Yet, most reporting is narrative led versus publishing quantitative or financial data regarding impacts. For example, 37 percent of the N100 use a narrative approach versus 3 percent disclosing financial data on climate change risks.

The social element of ESG is now becoming a focus for companies. However, the shift to addressing social issues has yet to be translated into a comprehensive set of disclosures.

Currently, almost half of the G250 (49 percent) acknowledge social elements as a risk to their business. A smaller share of N100 companies (43 percent) address social risks. The elements cover areas such as community engagement, safety and labor issues, which are key risk areas for most companies. Companies also prefer to use a narrative description to describe social impacts rather than provide quantified data.

Governance risks are reported risks that may impact compliance or the integrity of the business, such as bribery and anti-corruption, anti-competitive behavior or political contributions.

Our research showed that less than half of companies across the N100 and G250 disclosed their governance risks – 41 percent of the N100 and 44 percent of the G250.

At the regional level, among the N100, Africa, Western Europe, and the Asia Pacific region have the highest level of disclosure at 49 percent across all three regions. Only a third of companies are disclosing risks in the Americas: North America (37 percent) and Latin America (33 percent). The Middle East region lags with just a 13 percent rate of disclosure.

In the G250, Japan and Germany have high levels of disclosure: 92 percent.

Leadership representation can help progress sustainable practices within a company by connecting strategy with sustainability issues. This brings sustainability closer to business operations and creates greater accountability. Yet only 34 percent of the N100 and 45 percent of G250 companies have this representation at the highest levels of the company.

The UK stands out as a leader (83 percent), jointly followed by Taiwan and France (75 percent), and South Korea (73 percent).

Sustainability-linked compensation at leadership levels can improve performance in areas such as meeting climate goals and increasing diversity. The inclusion of sustainability targets and metrics into compensation also sends a signal to investors and other stakeholders that the company’s leadership is serious about sustainability.

So far, 40 percent of G250 companies use sustainability-linked compensation for their Board or leadership. This is a positive indicator, as practices within the G250 tend to filter into the N100. Currently, less than one-quarter of N100 companies compensate their leaders based on attainment of sustainability-based goals (24 percent).