The timing is critical for organisational decisions on ESG

For the past few years, chief executives have responded to the ESG imperative, believing it’s best for their financial performance and attracting capital. In fact, the percentage of CEOs who connect ESG with improved financial performance has nearly doubled in the last year. But with recession fears looming and increased geopolitical tensions, organisations face a critical decision point: to hit the brakes on ESG or to accelerate.

KPMG’s US CEO Outlook features insights from 400 US CEOs, who were surveyed on key challenges and opportunities for driving business growth over a three-year horizon. The 2022 survey reveals a clear tension. Although most respondents say that the public and their stakeholders are pushing their organisations to step up on ESG, CEOs also are considering tightening belts ahead of a possible period of economic weakness. 

But I can’t say it enough: Now isn’t the time to hit pause. 

Organisations that integrate ESG into their core business strategies shouldn’t be tempted to unravel their efforts. After all, this could usher in negative consequences for their financial performance and capital infusions. It also could spell compliance trouble when the Securities and Exchange Commission’s long-anticipated climate-related disclosures rule comes to fruition, necessitating timely, rigorous and ultimately assurable ESG reporting.

A successful ESG journey typically involves four distinct phases: 

• Assess current state: Take a 360-degree view of ESG internally and externally, including conducting materiality assessments to understand your priorities. 
• Build strategy: Determine where you want to go with ESG, and your overall objective compared to your peers.
• Operationalise: Put the programmes in place to reach targets and commitments, enhancing your data and technology approach to accelerate impact. 
• Report and monitor: More than compliance, it’s about measuring the pace and success of the organisation’s ESG strategy. 

Fortunately, it’s not just CEOs thinking about competition or controllers thinking about upcoming reporting requirements but the entire C-suite. In KPMG’s fourth annual Chief Tax Officer Outlook, 38 percent of respondents cited ESG as the greatest risk to a tax organisation’s growth, ahead of regulatory (36 percent), geopolitical (33 percent), and supply chain (30 percent) risk, underscoring the importance of ESG as a top tax agenda item. 

Despite ESG’s emergence as a clear priority across the C-suite, 59 percent of chief executives in KPMG’s CEO Outlook stated they’d pause or reconsider ESG efforts to prepare for an anticipated recession, alongside other measures like workforce reductions (51 percent). This reveals a clear tension between prioritising long-term and short-term results. 

With most companies still in the early stages of market differentiation, companies that focus only on meeting quarterly earnings won’t be able to create the long-term value that will enable them to thrive in a low-carbon future. Look no further than to digital transformation in the 2010s as an example. Over the past decade, transitioning to the cloud, pivoting to software as a service, deploying automation and investing in data insights for predictive analytics were key drivers of enterprise strategies around digital transformation. 

The firms that invested in transformation are still outpacing their competitors today. Importantly, their embrace of digital transformation wasn’t transformational rather than surface level. Businesses implementing enhanced data and analytics across their entire organisations, from finance and accounting to human capital management and marketing strategies to create financial value. 

It’s important that CEOs see through this economic cycle, understanding the multitude of ways ESG engagement can drive financial value. For example, understanding recent changes to tax incentives and credits may unlock enhanced economics around the deployment of capital toward these planned investments, increasing financial value here and now, while accelerating transformation to gain a long-term competitive edge. Those who see these investments through will have the upper hand as economies strengthen. 

CEOs overwhelmingly state their stakeholders want to see strategy, transparency and results — 69 percent of respondents from the CEO Outlook state their stakeholders are demanding increased reporting and transparency on ESG issues, an increase of 11 percent from last year. This pressure from stakeholders will continue to grow as the number of CEOs who believe stakeholder scrutiny on ESG will continue to increase. 

CEOs can respond to this pressure by investing in an effective ESG strategy that considers the needs of all relevant functions and departments, including tax departments. After all, how can a CEO make good on a net-zero commitment without the data to prove it? Or how can they participate in what will soon be an ESG reporting economy without a robust understanding of the related accounting and tax implications? 

Building a state-of-the-art ESG reporting programme, for example, requires advanced data collection technology, comprehensive reporting infrastructure, high-quality processes and controls and an underlying strategy that ties it all together. 

When we see the value of these drivers and truly understand the transformational nature of the ESG imperative, organisations will be accountable not only to their stakeholders but also to their own aspirations. That’s the power of this ESG moment, and it will determine which leaders today become leaders tomorrow.

A version of this article previously appeared in Bloomberg Tax.