The evolution of ESG and the Chief Sustainability Officer

Few roles have changed so dramatically, so quickly, as that of the Chief Sustainability Officer (CSO).

The spotlight continues to brighten on responsible business practices. CSOs at banks, asset managers, broker-dealers and other financial institutions have responded to customer, regulator, and investor demands for increased transparency by providing greater details and a more timely discussion and report of their firms’ environmental, social and governance (ESG) performance.

It is more important than ever for financial services firms to centralize the management and strategic allocation of capital in ways that positively impact ESG issues. In order to best support their companies’ ESG goals, CSOs are broadening their skill sets and working across their organizations to define, measure and disclose how their companies are adhering to ESG principles.

Financial services company CSOs are adjusting to changes driven by several developments in corporate ESG.

ESG has risen to the top of the corporate agenda.

The financial allocation of green investments was once primarily the domain of asset managers deep within their own companies, and just one of many factors influencing their individual portfolio decisions. Companies are now realizing the importance of developing a firmwide ESG investment strategy. “We are sounding the alarm bells that if you are an investment institution and you’re not embracing this and taking it into account, it’s going to be at your own peril,” according to MSCI chairman and CEO Henry Fernandez.¹

Today, the C-suite understands that weak ESG performance represents significant financial risks and can adversely impact funding costs, while strong ESG performance can provide opportunities to gain competitive advantage and market share.

The sustainability officer is no longer the sole owner of ESG.

Integration of climate / green strategies and investments are increasingly supported by business heads, compliance, chief financial officers and the chief risk officers along with the CSO. Companies are appropriately prioritizing their ESG programs relating to their revenue-generating businesses, integrating efforts in the company’s operational strategy across functions. Additionally, we are seeing a transformation of CSOs evolving from a heavy public relations focus to one of setting ESG strategy for the company across products and services.

ESG terminology, materiality and approach can differ greatly across geographies, lines of business, and products. However, it is anticipated going forward that there will be a lean towards more consistency, driven by increasing regulatory focus as well as other developments impacting ESG reporting. Hence, there is an opportunity to align on the future state vision and agree what steps firms should take in the shorter term as well as the longer term when the investment community and market dynamics evolve. All disciplines must work in harmony together to effectively manage risk and capture opportunities across the entire enterprise.

Stakeholders demand data-based proof that firms are adhering to their ESG goals.

It’s one thing for a financial company to declare an ESG investment target over the span of a decade. It’s another to show where, how, and what impact that investment is having across the markets, industries and communities they currently serve. Increasingly we see companies applying a broader, more holistic consideration of ESG factors in their investment strategies. While environmental topics continue to be highly important, investors are looking for opportunities to drive additional benefits across a range of social domains, which improve the perceived ESG impact of the investments.

CSOs will continue to work more closely with their finance colleagues to ensure their companies improve data capture, cleanliness, and analysis (often with the help of modern technologies such as artificial intelligence), as well as to identify and report meaningful metrics to their shareholders and broader stakeholders. 

CSOs play a critical role in building ESG programs that can deliver five key outcomes.

The activity among financial institutions to define, standardize, and assess ESG activities and disclosures is intense. Many of them have made progress by establishing financing commitments to advance environmental and social issues, setting zero-carbon targets, and releasing details in annual ESG reports. The goal is to work toward an ESG program that establishes:

1. Standard ESG eligibility criteria, with continuity in investment and program goals across all global markets and front-office divisions.
2. A control framework that mitigates reputational risks inherent in external reporting.
3. A global operating model, optimized for deal tagging and commercial allocations.
4. Technology enablement for a modern, integrated approach to firmwide ESG data aggregation, with a reporting solution that operates across divisions and global product distribution.
5. A culture shift that supports applying an “ESG lens” to all transaction commercial decision making.

While the aim is to eventually harmonize global ESG standards, CSOs should continue to focus on identifying and accumulating relevant ESG data, with transparency and controls, to demonstrate their firm’s integrity around ESG commitments and disclosures for investors, counterparties and employees.

Actions to take today to advance ESG programs.

Numerous challenges exist to furthering ESG program goals, including multiple disclosure requirements and anticipated regulatory change driven by the new U.S. administration. However, CSOs can make progress by answering key questions, including the following:

• Which ESG standards are right for your company?
• What ESG concerns are your stakeholders most focused on?
• What role does your finance function play in being adequately integrated into ongoing and potential upcoming ESG initiatives?
• What information do you disclose publicly, and what can you disclose going forward?
• What are your data access, collection and analysis challenges?

Companies in the financial services industry are in various stages of their journey answering these questions and realizing ESG program goals. When we work with organizations on developing their ESG platforms, we leverage a framework that includes an assessment of ESG maturity and impact; strategy development to advance the company’s ESG footprint; business transformation to support ESG goals followed by implementation; and finally, proper measurement, quality reporting, and assurance.

Such a framework serves as a guide for financial institutions as they establish an ESG program that meets the unique needs of their organizations and their stakeholders, including coordination across functions and dedicated responsibilities. Examples include orchestrating the organization to strategize, plan and implement operating models in support of public commitments, real estate planning, sourcing renewable energy, etc., in addition to now managing the risks and commercial opportunities around ESG.

For more about how KPMG helps companies determine and deliver on their ESG strategies, visit KPMG IMPACT.