March 2024 Newsletter

Executive Pay | Compensation Is Increasingly Getting Tied To ESG Metrics And Climate Performance

Executive incentive plans are increasingly being linked to ESG metrics, with climate being the fastest-growing factor, while standards for employee benefits are also improving.  According to a recent survey, 81% of companies include ESG in their executive incentive plans, with climate rising rapidly through the ranks when it comes to compensation.

Executive incentive plans are increasingly being linked to ESG metrics, with climate fastest-growing factor, and employee benefits standards improve – WTW

Two surveys from one consulting company have shed interesting light on the differing fortunes of executive pay and employee benefits. WTW – which provides global risk advisory, insurance brokerage and consulting solutions – found that 81% of companies include ESG in their executive incentive plans, with climate rising rapidly through the ranks when it comes to compensation. In a separate survey, WTW found multinational companies are introducing global minimum standards for employee benefits, and that figure has almost doubled (to 70%) since 2019 (36%).

While this seems to be good (or at least better) news for business leaders and for rank-and-file employees, it’s interesting to see what motivates both. This is the fourth year that WTW has conducted its survey on the use of environmental, social and governance (ESG) metrics in executive incentive plans. WTW reviewed public-domain data from more than 1,000 companies for the study – which highlighted some interesting (if unsurprising) regional variations. ESG metrics are used in 81% of executive incentive plans globally, up from 77% in 2022. ESG is factored into pay in 76% of US companies, compared to 93% in Europe.

Environment and Climate Included in Executive Incentives: Most companies use ESG metrics in their short-term incentive (STI) plans, but long-term incentive (LTI) plans have also shown a steady increase, especially in Europe. ESG in LTI plans has tripled in the US and Canada since 2019, albeit from a low starting point.

More than three-quarters of companies in Asia Pacific used at least one ESG metric in their executive incentive plans. Australia, Singapore and Japan are leading in APAC, but other countries across the region are struggling to include ESG in their thinking. The good news, for all of us, is that there has been significant expansion in environmental and climate metrics – with 80% of companies in Europe including these in their plans. This growth in use of such metrics is rocketing in the US, where it has nearly quadrupled to reach 44%. That compares to 39% in Asia Pacific. WTW concludes that the incorporation of ESG metrics in executive incentive plans has become universal, while each industry emphasises the ESG factors with the greatest impact on their businesses.

Other research from The Conference Board backs up the WTW findings, and also states that ESG metrics for CEOs often also apply to other executives too. Their analysis of the Russell 3000 Index also shows a direct link between company size and the use of ESG performance metrics in executive incentive plans – the bigger the company, the more likely it is to include ESG considerations.

ESG performance metrics vary considerably by sector, says The Conference Board, with utilities (89.1%) and energy (72.7%) sectors among the leaders, but information technology (28.3%) and communication services (35.7%) lagging.

Worker Benefits Improve as Multinationals Adopt Global Minimum Standards:
Everyone loves a level playing field, and now more employers (70%) are providing a global minimum standard when it comes to employee benefits, according to WTW.

WTW reports that COVID-19 highlighted the important role benefits play in wellbeing, and resilience. This is important not just to retain existing employees, but to attract talent in an increasingly competitive market. The survey showed that 63% of companies are looking to use employee benefits to signal their purpose and values to stakeholders. This builds on the trend WTW has identified to use employee benefits to attract and keep talent and to support employee wellbeing.

“More employers are incorporating global minimum standards for employee benefits, as part of designing benefits that better support employee wellbeing, attraction and retention,” said Nigel Bateman, Managing Director of Integrated & Global Solutions at WTW. “Global minimum standards are one way to signal an ambition for employee benefits to be inclusive. But, for these ambitions to become a reality, there will need to be a fundamental shift in how many companies operate their benefits programs. “Wellbeing will need to be viewed as an outcome to be achieved, rather than a set of programmes to be added.” Read More.

Board Diversity | The Evolving Importance Of DEI 

Board members who took part in a new global survey say that having a diverse, equitable, and inclusive (DEI) workplace is important for them. Boards should start by making sure their diversity, equity, and inclusion practices align with their culture and core values; by examining if their messaging to employees clearly reflects why they’re engaging in DEI practices; and by understanding their audiences.

Employees who took part in a new global survey say that having a diverse, equitable, and inclusive (DEI) workplace is important to them. They also want their leaders to be vocal about how organizations are actively engaged in such efforts.

Catalyst, a global nonprofit promoting gender equity and workplace inclusion, analyzed 6,800 employees in 11 countries and found 93 per cent want their organizations to detail to their teams how they are creating more equitable workplaces. Although, 24 per cent report that senior leaders never or rarely engage in discussions about the matter.

The survey also shows that the way leaders talk about diversity efforts has a direct impact on employees. For instance, the fairness case justifies diversity initiatives by highlighting how it’s the socially good and morally right thing to do, is consistent with the organization’s values and contributes to creating a fairer workplace.

In this case, employees are more likely to view their employers as fair, experience inclusion and remain at the organization. On the other hand, research shows that using a business case for diversity has been linked to lower feelings of belonging in women and LGBTQ+ employees. Framing diversity according to its benefits to an organization can have negative consequences for hiring underrepresented job candidates.

A key finding was when using both cases, organizations should emphasize the fairness case to increase the likelihood of positive employee results.

“In this polarizing moment when efforts to build equitable workplaces are under attack, it’s significant that employees want to see proactive steps from leadership, along with clear communication regarding the actions being taken to create a diverse workplace where all employees can belong, contribute, and succeed,” said Emily Shaffer, PhD, a senior director of research at Catalyst and lead author of the report. “Workplace inclusion is not a game with winners and losers; it’s a universal win, fueling creativity, elevating performance, and creating workplaces where all talent can thrive.”

The report also provides practical suggestions for clearly discussing DEI practices with employees.

“Organizations should start by making sure their diversity, equity, and inclusion practices align with their culture and core values; by examining if their messaging to employees clearly reflects why they’re engaging in DEI practices; and by understanding their audiences,” stated Shaffer. “Going back to the basics allows companies to demonstrate their commitment in a way that resonates with employees, leaders, and stakeholders.” Read More.

Industry News | COP28: Key Takeaways For Board Directors

Boards have a clear signal to consider the opportunities of incorporating renewable energy into business operations, either generated on-site or through suppliers. Board directors may want to encourage engagement with policymakers to understand how the organizations can contribute to national plans and request regulatory and financial support to do so.

COP28 concluded with significant progress on the energy transition, climate finance, food systems transformation and nature. However, some stakeholders consider that it falls short of the level of ambition needed to limit global temperature rise to 1.5⁰C. This briefing summarises the main COP28 developments that board directors should know to understand the implications for their business strategy and investment decisions.

COP28: The first Global Stocktake and the UAE Consensus
The host of COP28, the United Arab Emirates (UAE), welcomed world leaders from almost 200 nations – the largest number of participants in the history of COP – to conclude the Global Stocktake and confirm the actions of each country to tackle climate change. The ‘UAE Consensus’ provided the final conclusions of the negotiations which includes:

A transition away from fossil fuels in an orderly and equitable way in line with the science: countries committed to ‘transition away’ from fossil fuels and to maintain the language from COP26 to ‘accelerate efforts towards the ‘phase-down’ of unabated coal power’. Tripling renewable energy capacity and doubling energy efficiency by 2030: countries committed to triple renewable energy, and double energy efficiency and to accelerate clean hydrogen and nuclear energy. Carbon capture, utilisation and storage are also potential solutions to reduce emissions, particularly for the hard-to-abate sectors.

Reducing methane emissions, reducing emissions from transport, and switching to zero and low-carbon fuels by 2050: countries committed to reducing GHG in different industries and phasing out inefficient fossil fuel subsidies that do not address energy poverty or just transitions, but none of these terms are defined.
Food systems transformation and nature-climate integration to solve the climate crisis: there is recognition of the need for multisectoral solutions such as nature-based solutions, land-use management, sustainable agriculture and resilient food systems. The best available science and Indigenous People’s knowledge are both considered to implement those solutions. A total of US$85 billion was pledged by governments to support the delivery of these commitments. The capital was divided into nine work streams:

$61.8 billion to climate finance
$8.7 billion to lives and livelihood
$6.8 billion to energy
$3.5 billion to the Green Climate Fund (GCF)
$1.7 billion to inclusion
$792 million to loss and damage
$134 million to the adaptation fund
$129 million to the least developed countries fund
$31 million to the special climate change fund

Countries must now review and set new Nationally Determined Contributions (NDCs), the national action plans under the Paris Agreement, following the call to action of the UAE Consensus.

Key messages for board directors:

The world is shifting away from fossil fuels towards low-carbon energy sources with a focus on renewables but recognising clean hydrogen and nuclear energy need to be part of the mix.
Boards have a clear signal to consider the opportunities and risks of incorporating renewable energy into business operations, either generated on-site or through suppliers. Transitioning to renewable energy will likely be a significant decarbonisation strategy for businesses given the commitment from governments made at COP28. Over 400 organisations have already committed to going 100% renewable providing a great peer group to learn from and share good practices.

As a result of the COP process, governments may introduce new policies favouring renewable energy business or penalising high-emission industries. Similarly, financial institutions may be likely to prioritise investment in low carbon energy projects over more traditional fossil fuel investment. Board directors will need to keep track of these developments to understand the implications for business strategy and investment decisions. Board directors may want to encourage engagement with policymakers to understand how the organisations can contribute to national plans to move away from fossil fuels, and request regulatory and financial support to do so.

Increased investment in renewable energy and other low-carbon options may impact global energy markets and influence future energy prices. Boards may want to track the cost implications for the business to determine strategies for transitioning to clean energy within the organisation, as well as look at the potential risks and opportunities across the organisation’s value chain. The Taskforce on Net Zero Policy, formed at COP28, will support the creation of effective policy and regulatory frameworks to underpin net-zero commitments and accompanying transition plans by non-state actors, including businesses.

Developing a clear transition plan will be a key tool for organisations to set a clear strategy and delivery plan to decarbonise business operations in line with becoming net-zero and nature-positive. The UN intends to hold non-state entities accountable for emissions reduction commitments and signals towards increasing expectations and requirements for corporate climate transition plans, similar to recent trends for sustainability reporting. Board directors may want to ask their boards what measures are in place to develop and implement a clear transition plan. The transition planning toolkit from Chapter Zero may help with that process.

Governments, investors and civil society are increasingly demanding businesses to disclose transition plans and climate commitments, now tracked by the Net-Zero Data Public Utility (NZDPU) launched at COP28. The NZDPU, a new global repository of corporate data on climate change is open for public consultation until March 2024.

The climate reporting landscape is shifting. Board directors should ensure that their organisation is ready to respond to these changes and disclose material information. At COP28, the Task Force on Climate-related Financial Disclosures (TCFD) was officially disbanded, with the IFRS Foundation’s International Sustainability Standards Board (ISSB) taking over the TCFD’s responsibilities for corporate disclosure of climate targets, risks and opportunities. In addition to the TCFD recommendations, the ISSB sustainability standards require some additional industry-based metrics and information on corporate carbon credits.

A global shift to jointly tackle nature and climate is gaining momentum. Policy and finance will increasingly align with this dual focus and businesses are likely to face heightened expectations. A pledge to transform the food systems will also support climate and nature by reducing biodiversity loss and GHG emissions.
With increasing stakeholder expectations to disclose nature-related corporate information, board directors should consider reviewing whether nature is included within the organisation’s net zero strategy and whether it is a topic to raise in the boardroom. Board directors should also keep in mind that governments may suggest or enforce nature-related disclosure for businesses possibly adopting recommendations from the Taskforce on Nature-related Financial Disclosures (TNFD), which launched its sector guidance at COP28.

Financial institutions are shifting to an integrated nature and climate response. The Glasgow Financial Alliance for Net Zero (GFANZ) aims to incorporate nature into financial sector transition plans in 2024.
The global focus on nature alongside climate may impact the skills and competencies expected of board directors. Boards may want to cultivate leadership in addressing and managing climate and nature-related risks and opportunities. It will also be important to ensure there are appropriate skills and capabilities across the organisation to enable effective implementation.
The unprecedented number of public sector climate finance contributions and pledges at COP28 will help to unlock private finance.

COP28 recognised that public funds alone will not be sufficient to cover the required climate mitigation and adaptation action needed to deliver the binding commitment of the Paris Agreement. The UAE committed US$30 billion in public funding to mobilise US$250 billion of private funding through a new investment platform called ALTÉRRA. These investments will primarily support emerging markets and developing economies (EMDEs). Board directors may suggest their organisation look at options to access blended financing solutions, particularly in relation to operations in EMDEs. Although there were no major breakthroughs on carbon markets at COP28, it remains a pending item that countries will submit their views on in early 2024. Consideration of existing tools to support climate finance such as green bonds and internal carbon pricing may be helpful for boards to review in the immediate term.

Looking to the year ahead:

COP28 concluded with agreement on the need to move away from fossil fuels, (the main contributor to climate change), in line with the science with country commitments to translate this into concrete action.

Countries will reconvene in Azerbaijan for COP29 in 2024, which is expected to have a strong focus on climate finance. Countries will also meet at the biodiversity summit, COP16 in Colombia, outcomes from which will be significantly relevant following the joint declaration on climate and nature. In 2025 at COP30, which will be hosted in Brazil, countries will be expected to submit their updated NDCs that should address and incorporate recommendations from the Global Stocktake which was finalised at COP28.

The Global Decarbonization Accelerator (GDA) was launched at COP28 to fast-track reducing GHG emissions including methane. It is supported by the Global Renewables and Energy Efficiency Pledge, signed by 130 countries. This pledge aims to generate at least 11,000 gigawatts of renewable energy, which requires a tripling of current global renewables capacity, and double the global annual energy efficiency rate.

The ambition to scale up nuclear energy was supported by 20 countries that signed the Declaration to Triple Nuclear Energy by 2050. The Declaration of Hydrogen, endorsed by 37 countries, sets an intention to prioritise clean hydrogen (produced using renewable energy sources) over fossil-fuel based hydrogen.
Net-zero transition

A Task Force on Net Zero Policy was established to ensure credible and accountable net zero commitments from non-state actors, including businesses, who should follow the recommendations of the Integrity Matters report launched in COP27. Creation of the UN Net-Zero Export Credit Agencies Alliance (NZECA) which will support its members to transition to net zero by 2050 or sooner. Launch of the Industrial Transition Accelerator (ITA) for heavy-emitting sectors. The accelerator has $30 million to support emission-reduction projects.

A vision to tackle the climate and nature crisis together was announced through the Joint Statement on Climate, Nature and People. Future climate and biodiversity COP summits will work together to achieve both the goals of the Paris Agreement (1.5⁰C pathway) and those of the Global Biodiversity Framework (to halt and reverse biodiversity loss) by 2030.

The intension to transform the food systems was formalised through the Declaration on Sustainable Agriculture, Resilient Food Systems, & Climate Action commits to incorporating 1.5⁰C-aligned food systems within national climate plans. The Nature Conservancy and Global Renewables Alliance announced that they will work on a strategy to deliver the aims of the Global Biodiversity Framework whilst working towards the COP28 energy pledge to triple renewables. The Taskforce on Nature-related Financial Disclosure (TNFD) released guidance for nine sectors to report on nature-related interactions. This includes guidance for hard-to-abate sectors such as oil and gas, and mining. Nine multilateral development banks (MDBs) agreed on nine common principles to define and track nature-positive finance.

The Energy Transition Accelerator announced the adoption of a new framework for high-integrity carbon credits. The Accelerator aims to attract private capital to support the energy transition in low and middle-income countries. The New Global Capacity Building Coalition was created effectively deploy climate finance by assisting financial institutions in emerging markets and developing economies (EMDE).
The four multilateral climate funds: the Adaptation Fund (AF), the Climate Investment Funds (CIF), the Global Environment Facility (GEF), and the Green Climate Fund (GCF), announced that they will collaborate to harmonise procedures, facilitate blended finance and boost the underfunded AF.
A fund for loss and damage moved from pledges at COP27 into action at COP28. High-income countries pledged capital amounting to almost $800 million. The fund is expected to be fully operational with the World Bank managing establishment of the fund in the interim.

Vulnerable countries will be supported by the newly created Task Force on Credit Enhancement for Sustainability-Linked Sovereign Financing. The Task Force will seek solutions to catalyse investment from the private sector and improve access to risk mitigation and credit enhancement.
A roadmap for the financial sector to support just transitions was released by the UN Environment Programme – Finance Initiative and the International Labor Organisation, referred to as ‘Just Transition Finance: Pathways for Banking and Insurance.’ Read More.

Board Composition | Changing Methods of Boards To Ensure Director Independence Is Effective

Boards are looking to improve independence of directors to achieve better advisory and board objectives as well as to reduce any potential conflicts of interests. A challenge boards at times experience is to ensure that the advisory of a completely independent director maintains regulatory compliance while being business-friendly at the same time

Debra McCormack regularly sits down with corporate directors to help them gauge how independent their board is. “Boards are often bringing us in to have these facilitated discussions,” says McCormack, global board effectiveness and sustainability lead with Accenture. “It’s because they’re hard. So they say, ‘Debbie, will you come in and help us talk about, do we have the right level of independence, and are we meeting the expectations that are required of us?’”

For McCormack, director independence is critical because it allows board members to take positions that are in opposition to management.

“It’s that healthy board-management tension that needs to be out there, having the robust discussions that they have,” she says. “Independence is important from the advisory and the monitoring function so that [directors] can actually do their oversight and be objective about it. Most importantly, I think board members need to make those decisions that are in the best interests of the shareholders, so it means there’s no conflict of interest.”

Public companies must meet legal requirements for appointing directors who don’t have a material relationship with the business and stay out of its day-to-day operations. However, some experts question how useful the current definition of independence is and argue that board members can easily fall under management’s sway, leaving the organization vulnerable to activist investors.

Meanwhile, long tenures by directors who might be independent in name only are hindering efforts to boost board diversity.

“Public companies have always been well served by independent directors who bring different perspectives, experiences, different industry backgrounds,” says Tierney Remick, vice chair and co-leader of the global board and CEO succession practice at organizational consulting firm Korn Ferry. “When they’re sitting around the table, they’re bringing a perspective that’s both about the company but also what they see in other similar or aligned situations. They’re also, first and foremost, always focused on the stakeholders.”

In the U.S., the federal Sarbanes-Oxley Act of 2002 mandates that boards of public companies have only independent directors on their audit, compensation, and nominating and governance committees, McCormack says. “The exchanges also have adopted their standards for it, and they of course tie out to what the legal mandate is.” There are rules at the state level too.

The New York Stock Exchange and the NASDAQ Stock Exchange both require that the majority of board members of a listed company be independent. The two exchanges also mandate that to qualify as independent, a director of a public company can receive no more than $120,000 in compensation from it during a 12-month period.

However, there are no mandated term limits for directors, which could put their independence at risk. “Board members who may have worked with management over long periods of time can form really great friendships, and it may challenge the independence,” McCormack says. “They become friendly with management versus being truly objective.”

Many European countries have set term limits, McCormack notes. “It actually makes them require refreshment on the board to meet the requirement of having that majority of the board members be independent,” she says. “That’s one area where we see some challenge in the boardroom, because you want those board members to be asking those difficult questions.”

When it comes to director independence, boards have made progress, Remick argues: “Ten, 15 years ago, it was very much a relational connectivity that created the composition of a board,” she says. “Over the last 10 years, and especially the last five years, the highly functional boards are very strategic, very objective in how they go about bringing new board members in. The timing; how it balances with all the other skills on the board; how does it align with the strategic need. So I think there’s been a shift in terms of how boards approach this.”

Korn Ferry has noticed another shift, Remick adds. “We’re actually seeing an increased amount of private boards that don’t, frankly, have the requirement to be as independent, but they are actively seeking multiple independent directors for private boards, including private equity boards, for the same reason,” she says. “They want objective, stakeholder-managed; they can’t be bought off by management for whatever reason. They bring great experiences, great perspectives. They can challenge without being super critical if they’re well trained.”

But according to governance expert Richard Leblanc, the definition of director independence is flawed. “It doesn’t identify preexisting social, political, personal relationships that a director may have who may qualify to be independent but may not have independence of mind inside the boardroom,” says Leblanc, a professor of governance, law, and ethics at York University in Toronto. For example, a director might have attended college with the CEO.

Leblanc, who also flags the absence of mandated term limits, gives a few examples of inducements that management can offer directors. “‘Would you like to go for dinner? Would you like to come to a meeting? Would you like to go to the club? Would you like to go to the resort?’ All of these things are below the radar screen.”

It’s easy to “capture” a board of directors, Leblanc maintains. “You spend 10, 20 grand, and you now own the board,” he says. “Even if you get an independent director on the board, there’s nothing to say that you can’t use management resources to capture that person.”

Activist investors are taking advantage of this situation, Leblanc warns. “When I help activist investors,” he says, “they tell me that every single director is captured. It’s just a matter of finding out the relationship, the interlock.”

If they decide to attack a company, activists hire people to delve into each director’s background and show preexisting ties with management, Leblanc explains. “It might be scholastic, it might be work-related, it might be favors, gratuities, gifts,” he says. “The activists are really stepping into the regulatory breach.”

When McCormack talks to clients, they keep bringing up the length of time that some people serve on a board. In the 2022 U.S. Spencer Stuart Board Index published by the executive search and leadership consulting firm, the average tenure of an independent S&P 500 board member is 7.8 years, she notes.

“Some board members have been on the board for over 20, and some of them…this is their first year,” McCormack says. “But they’re all still evenly considered independent. And some of those, if you think about it, have likely been there longer than the CEO or multiple CEOs.”

That impacts board diversity, McCormack stresses. Last year, 68% of directors on S&P 500 boards were men, according to Spencer Stuart. “Is that where we want to be?”

It looks like many corporate leaders share the same concern. In the recent United Nations Global Compact–Accenture CEO Study, 31% of the roughly 2,600 chief executives surveyed said they want to increase the diversity of their boards, McCormack says. “If we’re not pushing on refreshment, then that’s not going to happen.”

Do the rules around director independence need reform? Yaron Nili, an associate professor of law at the University of Wisconsin–Madison, would like to see some changes. Today, in response to pressure from investors, the vast majority of directors at large-cap U.S. public companies are so-called independents, he relates. “But what does it mean in practice?”

Most of those organizations now also have an independent chair or a lead independent director who is meant to help the board keep management’s power in check. But after examining data from 900 companies for a recent paper, Nili found that many “board gatekeepers” don’t live up to the title. “Even though companies designate those types of roles, they often lack any material powers.”

That shortcoming exposes the trouble with relying on the abstract concept of independence, which can mean different things to different people, Nili says. For him, the answer is better disclosure: “Regulation that makes sure companies provide investors with adequate information so that they can determine for themselves that they view that person, that director, as independent or not.”

Such a move would empower directors, Nili reckons. “Once they allow investors to have more information on how companies designate a director as independent, they can push companies to provide them with more substantive tools,” he says. “With more information that they can utilize in order to provide checks and balances to management, with more powers that are granted them in the corporate documents that allow them to create a board environment that allows independence to actually manifest in practice.”

Although he doesn’t see much appetite in the U.S. for more regulatory reform, Leblanc recommends a similar change. “The definition should be tightened so that you’re actually measuring true independence,” he says.

Leblanc also thinks the Securities and Exchange Commission should compel listed companies to disclose the origination of each proposed board member. “How and why did you choose this director?” he asks. “You should also be compelled to explain your nomination procedure.”

Besides competencies, that explanation should address gender and diversity, Leblanc suggests. “There’s been some movement on diversity, but there still is a considerable latitude that directors and boards have,” he says. “It’s the old adage: It’s who you know. That doesn’t build a good board. A good board is based on what you know, not who you know. Who you know should be disqualifying.”

In the U.K., boards of public companies must undergo regular peer reviews of their independence by third parties. Along the same lines, many U.S. boards now do an evaluation every two or three years, observes Remick, who calls it a “board effectiveness health check.” This process aims to ensure that all directors are contributing as anticipated and that the boardroom culture is conducive to supporting management, she says. “The chair leads that effort, but you usually have a third party who helps activate around it.”

McCormack favors such assessments: “Our clients find that the board evaluations are critical to enhance their overall performance and effectiveness, and independence is part of that, especially when a third party would come in.”

She also recommends having an annual discussion about board members’ independence. “Is there someone who’s been providing services to the board?” McCormack asks by way of example. “Does it hit the $120,000 threshold?”

For McCormack, it comes back to board refreshment too. “Boards should look at their skills matrix each year and determine if they have the right directors to support the company’s strategy,” she says. “That is something that will help them look at their independence and help them look at knowing if they have the right skills, versus do they have to go find those skills.” Read More.

Environmental, Social and Governance (ESG) | Boards adapting to growing impact of ESG Initiatives

Driven by reporting and shareholder demands, 90% of the publicly listed companies responding to a recent survey by KPMG said that they are adapting to the increasing budgets and growing impact of investments in environmental, social and governance capabilities over the next three years.

Most companies plan to spend more on ESG within the next three years, but they are less sure about how to execute on those strategies, a survey report published Feb. 13 by KPMG found.

Driven by reporting and shareholder demands, 90% of the 550 companies responding to the survey said they will invest more in environmental, social, and governance capabilities in the next three years. U.S. firms represented 61% of respondents, followed by 25% in Europe, 12% in Canada or Mexico, and 1% each in Asia Pacific and South America.

Respondents represented multiple industries such as energy, financial services, technology, healthcare and transportation.

The main increases in ESG spend in the next three years will be through adding dedicated ESG personnel, software, and more employee training and education, among other steps, respondents said.

However, the Addressing the Strategy Execution Gap in Sustainability Reporting survey report found “a clear disconnect” between strategy and execution, with just 33% of companies having restructuring plans to align sustainability goals with business strategy.

Top challenges cited by companies included insufficient resources, collaboration or communication, divergent priorities, difficulty measuring return on investment and budget constraints.

Additionally, while 83% of companies considered themselves ahead of their peers on ESG reporting, 47% still use spreadsheets to manage ESG data, and only 18% use third-party verification sources.

The survey found many companies hoping for new technologies to help integrate sustainability practices, including artificial intelligence and machine learning, but Tegan Keele, KPMG’s U.S. climate data and technology leader, said in a news release that “AI and ML are not a silver bullet for sustainability reporting or for setting a strategy that adds value to the business.”

KPMG experts also cautioned companies not to focus on compliance at the expense of adding value. “Compliance alone should not dictate an organization’s strategy — focusing on the core elements of ESG that will drive financial value over the long-term is paramount,” Maura Hodge, KPMG’s U.S. ESG audit leader, said in a news release. Read More.

Featured Blog

Navigating Board Evaluations: A Vital Component Of Effective Governance: 

In the world of corporate governance, board evaluations are a crucial practice which help organizations assess their board as well as the overall organization’s effectiveness and performance. These evaluations, when conducted rigorously and thoughtfully, can lead to improved decision-making, enhanced transparency, and ultimately, the overall success of the organization. Effective evaluations help boards align their activities with the organization’s strategic goals, ensuring good governance practices. Read More.

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