CEOs see ESG business benefits as scrutiny increases

KPMG finds 45% of company leaders see ESG improves financial performance but some lack resources

The leaders of major companies around the world see the merits in improving their businesses’ ESG criteria, but those CEOs also say they are in a pinch to do so while on the brink of a recession.

This is among findings in a report KPMG published after surveying more than 1,300 CEOs of companies in 11 markets.

Nearly half, 45%, of CEOs said ESG programmes at their companies improve financial performance, seemingly in line with the views of many asset managers that have been busy building out sustainable investment products.

“CEOs increasingly understand that businesses embracing ESG are best able to secure talent, strengthen employee value proposition, attract loyal customers and raise capital,” KPMG’s report read. “ESG has gone from a nice-to-have to integral to long-term financial success.”

Regardless of their thoughts on the business impact of improving on ESG factors, most CEOs, 69%, said their investors and customers have increasingly been demanding reporting around ESG, according to the report. By comparison, 58% said the same in KPMG’s prior survey in August 2021.

Further, 72% said that such scrutiny from investors and customers will keep growing, compared with 62% who said so in the previous survey. They also indicated that more people are wary of greenwashing, with 17% of CEOs saying investors are sceptical about companies’ ESG claims, up from just 8% who said so earlier.

Money talks

Even though more than half of company leaders did not say they see ESG as a performance driver, 62% still indicated they will use at least 6% of revenues to make their businesses more sustainable, KPMG found.

Yet, half of the CEOs also said they have frozen, or are reconsidering, their ESG initiatives for the next six months in light of economic circumstances.

On that note, KPMG had a warning.

“ESG has become an intrinsic business imperative,” the company said in the report. “Delaying key ESG efforts could make businesses more reactive in the future rather than help them lead the way with greater transparency, resilience and sustainability.”

Falling behind

Some 17% of CEOs pointed to business or economic issues that are drawing resources away from ESG efforts over the next three years. Meanwhile, 16% said changing regulations have caused that difficulty, and another 15% cited not having a necessary budget to put towards improving on ESG.

But at the same time, not meeting investors’ ESG expectations could lead to higher financing costs, 25% of respondents said. Another 22% said it would result in recruitment challenges, and another 21% indicated that failing on ESG imperatives would give their competitors a leg up.

One way companies have recently been securing favourable financing is through sustainability-linked bonds, which over the past two years have grown immensely in popularity.

Bond investors apparently have been clamouring for those, but sustainability-linked bonds have come under significant scrutiny. Those bonds, which penalise borrowing companies for not meeting sustainability targets, often have provisions that are difficult to enforce or benchmarks that are set far too low for meaningful impact.

DEI progress

CEOs in the survey said they felt companies can do better on diversity, equity and inclusion. Progress made by businesses in that regard has not happened quickly enough, 68% said, up from 52% who said the same a year ago.

Nearly three-quarters said they expect that there will be more attention from investors over DEI performance during the coming three years, according to KPMG.