Some commentators have said companies need an environmental, social, and governance (ESG) controller or chief sustainability reporting officer to contend with an increasingly scrupulous environment in which regulators and other stakeholders are demanding heightened transparency and accelerated progress around ESG-related risks.
Today, chief sustainability officers, chief financial officers, controllers, and risk management and compliance officers each have a seat at the table for ESG strategy, operations, and, soon enough, reporting.
Maura Hodge
And yet, the confusion inherent in Abbott and Costello’s famous sketch is not too dissimilar to the challenges companies face today. Everyone wants to know who is managing ESG and what falls within their purview. And with mandated ESG reporting on the horizon, “I don’t know” is no longer an acceptable response.
Most companies now agree ESG and business strategy are inextricably linked. And they recognize reporting on ESG criteria enhances trust among stakeholders and also drives value creation, promotes resiliency, and helps build competitive advantage.
Rob Fisher
According to the KPMG Global Survey of Sustainability Reporting, all of the top 100 U.S. companies by revenue already report on ESG or sustainability matters to some extent. And 70% of U.S. CEOs believe their ESG programs improve their financial performance. So, instead of questioning if they should embed ESG into strategy, companies are considering how to do so efficiently and effectively.
In a textbook scenario, companies would start with a blank slate and have ample time to construct a well-thought-out ESG program.
First, they would conduct a materiality assessment to identify and internalize the ESG factors most closely aligned with their business objectives.
From there, they would develop an ESG strategy that would, over time, inform the creation of a data collection and measurement program.
And finally, with a robust ESG strategy and comprehensive data program in place, they would have the tactics, technology, and talent they need to report on ESG with confidence.
But the regulatory clock is ticking. Generally, compliance should never dictate an ESG strategy or any strategy, for that matter. However, with potentially just two years until mandated SEC disclosures come due, there needs to be flexibility.
Central to solving the ESG implementation puzzle having the right talent. Luckily for most companies, that talent already exists. Further upskilling, too, is a viable strategy. But while the global conversation around ESG strategy and reporting is moving at full steam, the organizational chart has not had an opportunity to catch up.
At some companies, sustainability roles are deeply integrated and have a direct line to the chief executive officer and the board of directors; at others, these roles reside deep within compliance, risk management, finance, or another department.
Some companies have instituted an ESG controller responsible for reporting and controls; others have opted for a sustainability CFO-like role with oversight of ESG targets, forecasting, impact measurement, and valuation. Still, others are at the very beginning of their ESG journeys and have not yet formally created sustainability roles — instead, they are ad hoc responsibilities tacked on to existing functions.
There is no one-size-fits-all solution to assembling an ESG team. But in considering where to start, we view the maturity of ESG strategy and the maturity of ESG reporting as the key drivers.
What does this mean exactly? Let’s take a company that has committed to becoming net zero by 2030. It has had its target validated by the Science Based Targets initiative (SBTi) and announced its roadmap to achieving the goal. Yet, the company calculates greenhouse gas emissions annually, the data collection process is via email, and calculations are performed in spreadsheets by one person with “all knowledge of the process in their head.”
In this instance, the company is mature in ESG strategy — it has well-informed targets and a comprehensive plan for achieving them — but is immature in ESG reporting due to insufficient infrastructure.
The company in our hypothetical scenario has different organizational needs than a company with comprehensive ESG data processes and controls but a lack of clear and cohesive strategic direction. If we delve deeper, we can think of ESG strategy maturity vs. ESG reporting maturity as a matrix:
This matrix may serve as a foundation for determining the skills an ESG controller or equivalent needs and where they slot in relative to strategy. More important than title, structure, or reporting line, however, is the ability to collaborate. ESG is a team sport, and having a deep bench of professionals knowledgeable on ESG issues — both on the strategy and reporting side — is critical. Respondents to a recent KPMG survey listed the ability to collaborate cross-functionally to drive action as the most important skill set in ESG governance.
Importantly, there is not an inherently “good” or “bad” starting point on this matrix. Every company is on its own ESG journey, and present-day maturity in strategy and reporting may be influenced by a multitude of variables. Progressing across the matrix is what may ultimately unlock value.
ESG programs do not form in a vacuum. Stakeholders play a critical role in influencing companies’ ESG priorities. The impetus for the SEC’s proposed climate rule, after all, is to meet investors’ demands for high-quality, highly comparable ESG data. Stakeholder demands include:
Investors calling for SOX-like controls over certain data programs;
Customers requesting DEI metrics when considering with whom to conduct business;
Suppliers including contractual terms requiring setting and achieving emissions reductions and/or net zero targets;
Business partners calling for better data governance with respect to cyber vulnerabilities; and
Talent demanding action to reduce greenhouse gas emissions in-house and along the value chain.
ESG strategy and reporting infrastructure must consider and evaluate the needs of all relevant players.
Ultimately, most companies have the talent to handle ESG reporting. The missing piece in the market, however, is data that is reliably and efficiently sourced, repeatably procured, and well-controlled.
We are in uncharted territory as companies and their third-party consultants try to inventory vast quantities of Scope 1, 2, and 3 greenhouse gas emissions, among other ESG data; synthesize it into digestible information; and report on it with the reliability, timeliness, and rigor of financial disclosures.
A comprehensive data program starts with defining metrics aligned to material ESG topics and ends with third-party assurance — first limited, then reasonable. It will take considerable time and resources and may require some outside help. Yet, constructing and implementing the data piece is imperative. And with the right team in place and a healthy sense of urgency, companies can win on ESG.
Maura Hodge is a KPMG ESG audit leader, and Rob Fisher is a KPMG ESG leader.
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