As consumer and societal demands increase for brands and businesses to commit to—and prove—sustainability in their products and operations, companies around the globe have made earnest, often specific, commitments to environmental, social and governance (ESG) goals, but are struggling on the journey to meet them. New research from global strategy consultancy L.E.K. Consulting addresses the urgency and the significant challenges.
According to the firm’s new report, Global Corporate Sustainability Survey 2022, in conjunction with Longitude, among the barriers companies face are divisions within the leadership team over how to balance short-term business and financial priorities with long-term ESG objectives, lack of processes and capabilities to build ESG programs, disconnects in strategy, product and service portfolios and supply chains, and internal cultures that are out of alignment. Aligning incentives and creating executive remuneration programs to support ESG is another significant challenge. Designing and executing effective ESG programs will require major rethinking of all these barriers and issues, in particular, greater internal consensus on the tradeoffs ESG and sustainability objectives require.
“Companies are willing, for very sound business and societal reasons, to become more sustainable, but they’re not fully ready, and far from able at a senior executive and board level, to deliver against those ambitions,” said John Goddard, partner at L.E.K. Consulting and vice chair, sustainability, in a news release.
Companies see great potential in their ESG commitments
Sustainability and ESG have significant momentum in the private sector. More than 700 of the largest 2,000 publicly traded companies have claimed net-zero commitments; 60 percent of the FTSE 100 have committed to net zero by 2050, and two-thirds of the S&P 500 have emission reduction targets.
And most companies with ESG commitments see them as far more than just ways to be compliant and reduce certain risks. According to the L.E.K. survey, 51 percent of organizations are approaching ESG as a growth driver, and a further 20% focus on it in the context of innovation.
In fact, 51 percent of executives agree that their company should address ESG issues—even if doing so reduces short-term financial performance with 54 percent of executives from publicly listed companies confirming this position.
“The most enlightened companies are driving themselves toward clear sustainability goals, as opposed to being purely compliance focused. They know it is best for the business, best for the planet and best for society,” Goddard said.
Significant challenges abound
Yet a fundamental challenge companies must overcome before meeting ESG goals is achieving internal consensus on handling the tension between short-term priorities and investments for sustainable growth.
Indeed, 58 percent of executives said there are “significant differences of opinion within the leadership team” on balancing short-term priorities with long-term ESG goals. “Analyzing financial and non-financial benefits of the strategic choices to achieve ESG goals is a tall order. It means quantifying non-financial benefits in a way that allows for careful strategic choices to engage fully in ESG,” Goddard said.
Aligning is also difficult because of the range and complexity of the risks associated with ESG and sustainability. L.E.K.’s broader work has highlighted the key ESG risks facing organizations, including:
- The cost of energy transition, supply chain sustainability commitments and regulatory compliance
- Finance-related areas, including stranded assets with lowered value, ESG ratings, which are yet not standardized nor consistent, and pressure from activist investors
- Reputation-related, including consumers’ increasing sophistication, “cancel culture” targeting corporations and talent and retention issues related to perceptions of about a company’s ESG stature
“Boards and executives are increasingly aware of the major sustainability risks, but they often lack the full context, characteristics and tools to advise and make decisions to manage them,” Goddard said.
Part of the challenge is the lack of metrics or key performance indicators (KPIs) to track progress toward ESG goals: Only a quarter (27 percent) of companies have any enterprise wide ESG KPIs in place, and fewer still have a full set in place (just 3 percent), according to the survey.
Without such metrics, companies will continue to struggle to align executive remuneration with ESG targets. “Company leaders acknowledge that linking executive compensation to sustainability targets will be a key step in achieving ESG goal, but too few companies are at this point yet,” Goddard said.
Executives paint a detailed picture of their ESG hurdles
The L.E.K. survey asked executives to select those challenges that may be affecting their ability to achieve their sustainability goal. Thirty-four percent selected “lack of strategic alignment across key stakeholders;” 33 percent selected “leadership team unaligned on what ESG ambition should be;” 33 percent selected “lack of relevant capabilities/skills for clear decision-making and accountability,” and 33 percent selected “lack of the right culture/mindset.”
When asked to select key areas where their organization is least prepared to deliver on ESG goals, 43 percent selected “reward and incentives frameworks” and 40 percent selected “the right culture, including tone and engagement from the top.” Among other key findings:
- 79 percent of executives said the organization has more to do to put the required skills and capabilities in place to deliver sustainability goals
- 59 percent said their company has not made substantial progress in understanding the financial risk and financial opportunity posed by climate
- 54 percent said their company has not made significant strides in integrating ESG factors into the way the company allocates capital
- 48 percent said they do not think their company’s current product and service portfolio meets the needs of a more sustainable future
Actions company leaders and boards can take
“There are a number of avenues organizations can take to overcome barriers to deliver on ESG goals,” Goddard said. “They involve establishing a common language with which to develop sustainability goals and begin to understand the strategic choices required to achieve the goals; investing in educational programs and support; engaging the full leadership team in analyzing the financial and non-financial strategic choices that might be involved in achieving ESG goals; begin to set measurable goals in order to set KPIs and enable reporting and tracking, and putting in place interim targets so remuneration can be linked to ESG strides.”
The firm surveyed 400 senior decision-makers from around the world, with a quarter drawn from the ranks of CEO or C-suite and the remainder from other senior roles, including those charged with ESG issues, such as Sustainability and Climate Change Directors. Respondents were drawn from across North America, Asia-Pacific and Europe, with a focus on Australia, China, France, Germany and the UK. Over a quarter (28%) were from companies with revenues of $10 billion a year or more, and a wide range of sectors are represented, including: Consumer Products, Healthcare, Pharmaceuticals, Industrials and Travel & Transport.