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Initially driven by ethical considerations, Environmental, Social, and Governance (ESG) has evolved into a core component of corporate strategy, risk management, and long-term value creation.

Companies are increasingly recognizing the significance of sustainability in their operations. In fact, the latest “KPMG Global ESG Due Diligence” report revealed that ESG has become a top priority over the past 12 to 18 months, a trend expected to continue.

Similarly, the “2024 Sustainability Organization Survey” by KPMG mentioned the growing commitment of organizations to ESG, with 90% of organizations planning to increase their ESG investments over the next three years.

The report also stated that 43% of these companies recognize the need for specialized roles focused on sustainability to ensure that ESG considerations are integrated into decision-making processes across the organization.

The demand for advanced software solutions tailored to ESG management is also increasing, with 40% of companies using ESG-specific software to improve data collection, analysis, and reporting. Meanwhile, 38% are investing in employee training programs to equip their workforce with the knowledge and skills necessary to support ESG initiatives and foster a culture of sustainability within their organizations.

According to the “2023 ESG Global Study” conducted by Capital Group, global adoption of ESG investment has reached a new high, with 90% of investors identifying as adopters, up from 89% in 2022 and 84% in 2021.

However, while the overall adoption rate is rising, the proportion of “conviction investors,” those who consider ESG central to their investment strategies, remains at 26%. The study also notes that 57% of investors believe incorporating ESG analysis can uncover attractive investment opportunities, and 45% think it is likely to improve long-term investment results.

Meanwhile, nearly three-quarters of ESG adopters prefer active investment strategies, allowing for better engagement and a more comprehensive view of company ESG profiles.

Disconnection between perception and preparedness

Despite increasing investment in ESG, a significant disconnect remains between organizations’ perception of their ESG readiness and their actual preparedness. The KPMG ESG Assurance Maturity Index shows that while 83% of organizations believe they are ahead of their peers in ESG reporting, nearly half still rely on spreadsheets for managing ESG data — a method lacking the robustness and scalability needed for comprehensive ESG management.

The reliance on outdated tools, according to the report, highlighted the gap in data management capabilities. As the complexity and volume of ESG data grow, so does the need for more sophisticated data management systems that can integrate sustainability goals with broader business objectives.

Furthermore, the maturity levels of companies in ESG also remain low. In fact, 75% of respondents are still in the early stages of ESG maturity, making them less prepared for ESG assurance. The lack of readiness is evident with only 25% of companies feeling confident in their ESG policies, skills, and systems to achieve assurance.

Investors also often struggle with defining a meaningful and actionable scope, obtaining high-quality data from target companies, and quantifying potential ESG findings. The KPMG report, however, noted that solutions are beginning to emerge.

For instance, there is now greater clarity on which ESG topics should be included, with a shift to focusing on value. Moreover, there is an increasing opportunity for sellers and sell-side advisors to add value through higher-quality ESG vendor documentation.

The latest “KPMG Global ESG Due Diligence Study” said that budgets remain low for ESG due diligence compared to other workstreams, such as financial, commercial or legal. This limits ESG specialists’ ability to perform in-depth analysis across the many complex environmental, social and governance topics that investors seek.

Another KMPG report mentioned that 44% of companies cite high initial costs as a major barrier to ESG. Many firms struggle to allocate adequate budgets for developing robust ESG frameworks, which hampers their progress.

Interestingly, beginners in ESG are facing between four to five main challenges, while more mature companies encounter slightly fewer with around three to four.

The rapid investment in ESG

ESG integration is becoming prominent across various industries as environmental concerns, social justice issues, and governance standards grow increasingly important to stakeholders.

According to a 2023 research by McKinsey & Company, companies that actively pursue ESG goals alongside traditional growth and profitability metrics tend to generate better returns for their shareholders. The study analyzed performance data from the world’s 10,000 largest companies between 2016 and 2022, and discovered that companies excelling in both ESG and financial performance, also known as “triple outperformers,” achieve an annual excess Total Shareholder Return (TSR) that is two percentage points higher than their peers who focus only on financial metrics.

This finding is particularly significant given the challenges of the past five years, which include the COVID-19 pandemic, high inflation, geopolitical tensions, increasing climate events, and the emergence of generative AI. Despite these challenges, companies with a strong focus on ESG were more likely to achieve or exceed the 10% annual revenue growth benchmark. In fact, more than half of the triple outperformers studied were able to accomplish this feat.

The research also indicates that the benefits of ESG-focused strategies are not limited to large and established corporations. Companies of various sizes and sectors can leverage ESG to enhance their growth prospects and resilience in the face of global challenges.

Leading investors are also using ESG to identify risks and unlock financial value. According to KPMG, they are incorporating ESG considerations into their investment theses, ensuring that ESG risks and opportunities are thoroughly understood and managed.

The focus on ESG is particularly evident in areas like decarbonization, recycling and circularity, and supply chain management. With improved ESG, investors can drive revenue growth, reduce costs, and mitigate risks to further enhance the overall value of their investments.

On the other hand, increasing regulatory requirements and pressure from customers and investors are compelling companies to adopt ESG frameworks. According to software-led risk management solutions provider Alcumus, 55% of companies cited regulation as a key reason for integrating ESG practices, while 54% pointed to pressure from investors and customers.

The same report also mentioned that about 60% of companies said that gaining an improved image is a significant benefit of ESG adoption, highlighting the reputational advantages associated with sustainable practices.

George Richards, Partner and Head of ESG Reporting and Assurance of KPMG in the UK, noted that forward-thinking companies are leading the charge by integrating ESG principles into their core operations to create significant value for their organizations.

“One of the potential benefits [of ESG is] that it allows the company to show how they will operate not only profitably in the long term, but also sustainably, in a much more credible way,” he said. — Mhicole A. Moral

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