Sustainability is one of the most pressing issues of our times, but KPMG’s latest survey suggests companies can do more to show how they’re managing ESG risks and opportunities.
Over the past two decades, sustainability reporting has become an accepted part of disclosure for corporations.
Virtually all of the world’s largest 250 companies (the G250) report on sustainability, according to KPMG’s new 2022 survey Big shifts, small steps, a comprehensive review of ESG reporting around the world.
But there’s pressure to improve, not least because many countries are moving from voluntary to mandatory reporting.
Another KPMG survey, the 2022 KPMG CEO Outlook, finds that more than two-thirds of corporate leaders are seeing significant and growing stakeholder demand for increased ESG reporting and transparency.
At the same time, CEOs are coping with huge economic headwinds, so it’s understandable that more than one-third say their organizations struggle to articulate a compelling ESG story.
With a growing urgency to reduce carbon emissions, halt biodiversity loss, and tackle societal inequality, effective non-financial reporting can help companies understand and then improve their ESG performance and demonstrate progress to stakeholders.
A snapshot of the latest global trends in ESG reporting
Although sustainability reporting is rising, certain regions are ahead of the game. Asia Pacific has the highest number of top companies that report, followed by Europe and Americas, with the Middle East and Africa trailing. Reporting rates are likely to increase due to the introduction of new regulations on non-financial reporting, particularly in China.
The use of global standards is on the increase, with the GRI (Global Reporting Initiative) the most dominant, while the ISSB (International Sustainability Standards Board) is gaining traction outside the Americas, particularly in Europe.
And a significant majority of reporting companies (around three-quarters) across both the G250 and N100 (largest 100 companies in each country) now disclose their “double” materiality.
Climate risk reporting on the rise
The growing prevalence of extreme weather events has brought home the real and immediate dangers of climate change. This is reflected in the survey findings, with more than 70 percent of companies reporting on climate-related financial risk. And, many companies are reporting against the Task Force on Climate-related Financial Disclosures (TCFD).
Close to three-quarters also report their carbon targets, although 20 percent do not disclose any link to an external target (such as a 2˚C scenario).
Acknowledging the business world’s impact on nature
Biodiversity loss doesn’t just harm the environment; it’s also a major and growing risk to business. According to the ‘Planetary Boundaries’ Framework, which sets environmental limits for humanity to thrive, biodiversity loss has already shifted beyond the boundaries into dangerous and unprecedented territory.
Currently less than half of companies within the N100 and the G250 recognize this risk in their reporting – although the numbers have increased since 2020.
New standards, such as the Task Force on Nature-related Financial Disclosures (TNFD), launching in 2023, and the EU’s new Corporate Sustainability Reporting Directive (CSRD), will hopefully drive improvements in biodiversity disclosure – and, consequently, action – over the coming years.
Aspiring to meet the UN Sustainable Development Goals
The 17 SDGs are a blueprint to achieve a better and more sustainable future for all by addressing challenges like poverty, inequality, climate change, and environmental degradation.
Encouragingly, most companies surveyed report on a number of SDGs. However, there is a general lack of detail, and companies typically do not disclose their progress against a specific target or targets within each goal. Additionally, the reporting tends to cover positive contributions towards SDGs and avoids mentioning any negative impacts, which fails to give a balanced view.
Environmental risks are the highest priority
Investors are increasingly requesting, or, indeed, demanding to see ESG reporting. The proportion of businesses reporting climate change as a business risk has gone up considerably in the past 5 years.
Despite these advances, there’s plenty of room for improvement. ESG disclosures are overwhelmingly narrative-driven rather than data-driven, which fails to paint a clear picture of how companies measure, track and manage risks.
And less than half of the companies report on social impacts (such as community engagement and labor issues) and governance risks (like corruption, bribery and anti-corruption, and anti-competitive behavior). These ‘S’ and ‘G’ risks can pose a serious threat to operations, reputation and the bottom line, and also need to be measured, tracked and managed.
Finally, the degree to which ESG reporting is taken seriously is reflected in the seniority of those driving its adoption. Just one-third of companies surveyed have a dedicated member of the Board or leadership team responsible for sustainability matters – suggesting that many have some way to go on their journey.
Maintaining momentum in sustainability reporting
ESG reporting isn’t merely about risks – it also brings opportunities; something recognized by the leaders taking part in KPMG’s Global CEO Outlook, with almost three-quarters agreeing that progress on ESG improves corporate financial performance.
At the same time, companies face other challenges like inflation, supply chain disruption, geopolitical events and talent shortages. As a result, 70 percent of global CEOs admit that ESG has fallen down the boardroom agenda as a top operational priority. Yet, with climate change and social inequity increasingly in the spotlight, companies need to find a way to balance these various imperatives.
Investors, asset managers and ratings agencies increasingly factor ESG into their assessment of corporate performance and risk, while regulators and customers expect to see full disclosure of ESG impact.
To ensure that non-financial reporting received the same level of attention as financial reporting, companies should consider the following:
- Adopt leading reporting standards and be part of a wider push towards global alignment in reporting
- Provide balanced reporting of both positive and negative impacts
- Introduce more data-driven measurement into ESG disclosures to accurately track performance
- Increase the level of biodiversity, social impact and governance risk reporting
- Appoint a C-suite level sustainability leader and align executive compensation with ESG performance
About the surveys:
This survey takes a detailed look at sustainability reporting trends around the world, offering insights on improving disclosure for business leaders, sustainability professionals and company boards. It’s one of the most comprehensive and authoritative pieces of global research on sustainability reporting, based on reviews of ESG (environment, social and governance) reports from 5,800 companies across 58 countries and jurisdictions.
The 8th edition of KPMG CEO Outlook, conducted with 1,325 CEOs between July 12 and August 21, 2022, provides unique insight into the mindset, strategies and planning tactics of CEOs of major companies in 11 key markets and 11 key industry sectors.