The Problems KPMG Has Identified in Corporate ESG Strategies
KPMG’s 2024 ESG Governance Survey reveals that, while companies have made significant progress in identifying the risks and opportunities associated with sustainability, the full realisation of these opportunities often remains outside the regular business planning cycle.
The report indicates that companies are recognising the importance of sustainability but struggle to integrate these considerations effectively into day-to-day decision-making.
This disconnect between ESG priorities and corporate planning processes presents a significant governance challenge.
"Companies have made significant progress in recent years in identifying the risks and opportunities related to how sustainability is considered in a company’s strategy," said Nadine-Lan Hönighaus, Global ESG Governance Lead at KPMG International.
"However, in many instances, the realisation of these opportunities or risks falls outside the normal business planning cycle."
Incentivising sustainability through remuneration
The survey highlights the need for boards to incentivise sustainability-minded behaviour among management.
A key takeaway from the report is that linking sustainability targets to executive remuneration can help ensure that sustainability is a top priority at all levels of a company.
"Therefore, incentivising sustainability-minded behaviour is a key element of an overall governance model that supports day-to-day decision-making," Nadine says.
This approach not only aligns executive interests with long-term sustainability goals but also ensures that management is accountable for meeting these targets.
The report also stresses that, while management sets the company’s strategic course, it is the responsibility of these managers to ensure that sustainability targets are integrated into their daily decisions.
"A company’s strategic course is set by its management, yet it is these managers who must help ensure that this course is adhered to in their daily decisions," explains Nadine.
Linking sustainability to governance
KPMG’s findings also underline the importance of integrating sustainability into the broader governance framework of a company.
The report notes that an effective governance model should anchor sustainability targets in the same way as other strategic aims, such as financial performance and growth.
"An effective way of providing them with further incentives to stay on course is to anchor the company’s sustainability targets in their remuneration, in the same way as other strategic aims," Nadine says.
This alignment ensures that sustainability is given equal importance to other key business priorities.
The report concludes that such integration is crucial, especially as investors and other stakeholders increasingly scrutinise how companies manage ESG risks and opportunities.
Changing governance models
According to KPMG’s survey, integrating sustainability criteria into executive pay is now a key element of corporate governance.
The report reveals that 78% of the 375 companies surveyed from 15 countries have already incorporated sustainability targets into board members' pay.
This figure highlights the increasing importance of ESG factors in corporate governance, reflecting stakeholders' growing expectations.
"For this reason, the management board pay system is a key aspect of corporate governance for a company’s shareholders," Nadine explains.
The report hopes to contribute to ongoing discussions within companies and between stakeholders on how to better integrate sustainability into governance models.
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