ESG Is Everyone’s Business

It’s all hands on deck for increasing ESG engagement, says Rob Fisher, KPMG’s US ESG lead

For years, companies have been feeling pressure from investors, employees, customers and other stakeholders to ramp up their environmental, social and governance (ESG) engagement. In KPMG’s 2022 CEO Outlook survey, more than 70% of CEOs reported that they were being held personally responsible for making the changes that will be needed in the years to come by reducing emissions, sourcing renewable energy and adopting policies that make companies better corporate citizens.

In recent weeks, the proposal by the US Securities and Exchange Commission (SEC) for climate-related disclosures has garnered a lot of attention from the business community. Details of the proposal will continue to be pored over as business leaders assess how to operationalise a climate strategy that would meet new requirements.

The SEC’s proposal would require public companies to report both their greenhouse gas (GHG) emissions and the impact of climate risk on financial statements. This will make accurate, climate-related financial disclosures a baseline expectation for companies, undoubtedly demanding deeper ESG engagement from businesses to rapidly advance their climate disclosure strategies and transition plans.

CEOs see this as far more than a reporting and compliance exercise. It presents business leaders with a unique opportunity to invest, engage and show their investors, employees, customers and other stakeholders how they are responding to their demands by reducing their carbon footprint and accounting for climate risks. The companies that do this effectively will gain an ESG advantage by building trust among their stakeholders.

Boards should look at their decarbonisation strategies now. Aligning with the Task Force on Climate-related Financial Disclosures (TCFD) framework, upon which the SEC’s proposal was largely modelled, is a good first step. In 2020 just one-fifth of the top 100 companies were reporting climate disclosures in line with the TCFD.

Many boards and leaders have, however, been preparing and investing for this moment by becoming much more knowledgeable about climate change. C-suite confidence on the issue appears to be high: 74% of corporate leaders in a 2021 global KPMG survey said they believe they have the climate knowledge that is needed to meet new requirements.

Business leaders will also need a strong technology and governance approach. Companies must evaluate their current operations and their ability to track Scope 1 and 2 emissions (and material Scope 3 emissions), and any gaps in their climate data. From there, they will need to identify the people, processes and technology necessary to create and execute a climate risk strategy and transition plan. As this roadmap takes shape, it will be essential for companies to take an integrated approach, embedding ESG into all of their operations.

Companies will also need to develop a strong data strategy that recognises that carbon footprint data are not as easily accessible as financial data in an enterprise resource planning (ERP) system. Climate data can come from multiple sources, and sometimes require complex calculations. No one can be expected to get this exactly right the first time, which is why companies will need to be nimble and prepared to refine their work.

In the end, with more transparency, strong governance and a new imperative to get things done, businesses that lean in and effectively embed ESG into all of their operations will be able to leverage this watershed moment into a strong ESG narrative that will set them apart from competitors and build trust with their most valuable stakeholders.