Increased corporate performance and stakeholder trust

In these uncertain times, where geopolitical issues rapidly ensue, ESG is more relevant.

In these uncertain times, where different crises and natural disasters rapidly succeed one another, Environmental, Social, and Governance (ESG) has become a focus for many corporations. Various stakeholders, including investors, civil society, and regulators, show a greater interest in the ESG landscape. Also, customers have become increasingly concerned about the ethical behavior of corporations. As a result, the demand for organizations to assess, act upon, and disclose the impact of their ESG actions and programs related to Sustainable Development Goals, has significantly increased. How and where sustainability information needs to be disclosed is also subject to increasing regulation in Europe and beyond via the Corporate Sustainability Reporting Directive (CSRD), which aims to provide market transparency on companies' sustainability performance, hence steering public and private funds to more sustainable businesses.

Based on scientific research containing quantitative sustainability and financial data of 149 unique European consumer and retail organizations, it becomes clear that it pays off for Consumer and Retail companies to adopt a long-term view and embed ethical business conduct into their organization. For investors, it becomes more and more interesting to consider sustainability performance when filtering their portfolios. For risk managers, it is important to recognize possible risks, threats, and opportunities when incorporating ethical responsibility and climate change. Thus, investments in ESG are likely to enhance the financial position of organizations. Furthermore, improving the organization's social performance, for example, will result in higher stakeholder satisfaction, trust, and involvement, which in turn positively affect corporate performance. Therefore, it is highly recommended that European consumer and retail corporations invest in ESG practices and integrate ESG into their risk management approach to enhance their financial position and stakeholder satisfaction. Moreover, from a risk perspective, companies can turn a necessity into an opportunity and the time to change is now. There are, for example, impact companies with clear social missions. Impact companies lead by example to build a better future together and take their responsibilities, but are also proactively sharing knowledge to support those who have the ambition to build a more sustainable business.

However, hiding negative actions through reporting positive activities leads to greenwashing, and the company will get caught at some point through its employees, investors, or customers. Also, the CSRD is explicitly aimed at preventing greenwashing by setting predefined reporting topics and KPIs. Hence, it is advisable that organizations further investigate how to approach ESG and start to report on sustainability in line with CSRD requirements. One way to start is to investigate how companies can become more sustainable by looking at the Sustainable Development Goals (SDGs). Seventeen global goals have been developed to help companies make their business more sustainable. Even if a company is not able to proactively pursue every goal, companies can at least make sure they do not have a negative impact.

Recommendations to risk managers

Risk managers acknowledge the significance of this topic because emerging risks, such as climate change, will impact strategic perspectives within the consumer and retail industry. For example, consumer goods and retail companies can strive to become fully climate-neutral by 2030 through wind turbines, solar panels, and biogas. Also, zero waste and recycling policies can be useful to reach sustainability goals. Therefore, it is critical to communicate how you will improve your ESG performance. An authentic and transparent roadmap for all stakeholders focusing on the long-term appears essential. On top of that, identifying and separately defining ESG risks can address risks and challenges in the existing risk taxonomy isolated from other risks. This shows commitment as well as the strength of analyzing the environment and upcoming trends. However, this will not work if organizations see ESG as a standalone project. Instead, it must be anchored in the organization's strategy, objectives, and products, creating chances for new markets and revenues. Furthermore, company culture and mindset are also key factors determining the success of the ESG strategy. Based on earlier KPMG research, other shortcomings are using a siloed structure, focusing on frameworks, and an inconsistent perspective on the organization's overall risk exposure and legacy technology. An evolved risk management function enables technology development and culture change, adds value, is attuned to helping management meet their objectives, and is central to the business strategy.

At KPMG, we support clients in embedding ESG into their risk management framework, ESG strategy development, and transformation to navigate dynamic business contexts resulting in a positive change to the world and society. We believe this is best obtained through a holistic learning-by-doing approach considering business opportunities. In addition, we believe that demonstrating the added value of transforming the organization into a more sustainable future helps continuing growth, motivating employees, satisfying customers, and improving investor trust to achieve the necessary compliance, sustainability reporting, and a foreseeable future for the next generation.