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Leaning in to ESG

The pandemic has created what will be a career-defining economic challenge for most CEOs. Given the scale of that challenge, many were worried that chief executives would be forced to relegate the importance of environment, social and governance (ESG) themes. However, our research shows that CEOs are still very much engaged with this issue, and in particular the ‘S’ of ESG. Close to two-thirds (63 percent) said that their response to the pandemic has caused their focus to shift to the social component of their ESG program.

That is not to say that CEOs are being deflected from the ‘E’ of ESG. Chief executives are more than aware that climate change also offers a significant economic and humanitarian threat over the coming decades and that there is a need to rebuild organizations in a way that supports a new and sustainable economy. The seriousness with which they take the issue of climate change is reflected in the fact that many believe that managing climate-related risks is key to their own job security and long-term legacy. When we asked CEOs whether it was likely that managing climate-related risks will be a key factor in them keeping their job over the next 5 years, close to two-thirds (65 percent) felt it was indeed likely.

Sandro Salsano's quote

To move forward, CEOs are looking to double-down on the structural shifts that have emerged during the crisis – 71 percent say they want to lock-in climate change gains that have been realized during the pandemic. Measuring and communicating the impact of environmental improvements, as well as social and governance performance, will be critical. Earlier this year at the World Economic Forum (WEF) in Davos, the WEF’s International Business Council published a paper with a proposed set of ESG metrics and reporting disclosures.1 Led by the WEF and developed by a task force composed of subject matter experts from Bank of America, KPMG and the other Big4 accounting organizations, the paper identifies a set of ESG metrics. Adoption of these metrics can bring consistency, comparability and transparency to reporting of non-financial information and ESG aspects of business performance, critical to demonstrating long-term value creation.

Future of work

COVID-19 has effectively forced many organizations to experiment radically with how work is done. For many organizations, virtual working kicked in literally overnight. With the pandemic transforming the world of work, 77 percent of CEOs say they will continue to build on their current use of digital collaboration and communication tools, and 73 percent believe that remote working has actually widened their available talent pool.

However, with advances in analytics, artificial intelligence, process automation, and the Internet of Things accelerating, the organization of the future will look very different: flatter, digitized and with a very different talent profile, potentially made up of fewer people with distinct new skills. CEOs will need to make some difficult people decisions and prioritize investment; focusing on bold and ambitious digital transformation moves. Two-thirds (67 percent) say they are likely to put their capital investment into technology versus developing their workforce's skills and capabilities (33 percent). Interestingly, this balance hasn't changed at all since the initial survey at the beginning of this year.

Customer-centric supply chain

In terms of the future operating model, supply chains have also been hard hit: 67 percent say they have had to rethink their global supply chain. However, CEOs are using this opportunity to ask how their supply chain can become a competitive advantage in the new reality that emerges. When we asked CEOs to say what was driving this supply chain re-evaluation, the top-ranked reason was to ‘become more agile in response to changing customer needs’ and ‘pressure from governments to bring production closer to home’ was second from bottom.

Many companies, particularly those with complex supply chains, were likely focused on continuity issues and managing ongoing uncertainty and disruptions. However, as they look to the future, a number of areas are expected to become critical: stripping complexity and cost out of supply chains, building end-to-end visibility, investing in automation and other advanced technologies, and building agility into the network of suppliers and partners.

  

Reflections for the new reality

Leaders need to ensure that we do not slip back from climate gains made as a result of the pandemic and instead build the foundations of a sustainable, green economy into the future. Companies can learn from how resilient (or not) their operating models proved to be during the crisis, to understand what areas would need strengthening to withstand environmental or climate challenges. With consumers increasingly focused on purpose-driven brands and sustainable products and services, companies are adapting their product and service portfolios in an effort to exceed those needs. At the same time, investors are increasingly focused on organizations’ ESG performance, with a particular emphasis on the ‘E’ of climate risk. The pandemic has been a major crisis with huge humanitarian implications, but it has also been a time where sustainable and socially responsible companies have come into their own. Organizations that are building robust ESG reporting programs – along with resilient and flexible supply chains and a talent strategy that focuses on the people and skills needed for a more agile and virtual future – will be well positioned.

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Footnote

1 Toward Common Metrics and Consistent Reporting of Sustainable Value Creation, Consultation Draft, WEF, January 2020.
 

Unless otherwise indicated, throughout this report, “we”, “KPMG”, “us” and “our” refer to the network of independent member firms operating under the KPMG name and affiliated with KPMG International or to one or more of these firms or to KPMG International.