ESG Conundrum PDF
ESG Conundrum PDF
ESG Conundrum PDF
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Key
takeaways
Implementation lags.
While 95% of companies have ESG goals, only 10% have
made significant progress toward meeting them.
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Uncertainty as
opportunity
Our research reveals that ESG can operate as an accelerator that drives profitability
and growth.
The IBM Institute for Business Value (IBV) analyzed the results of two in-depth
surveys. In the first, we surveyed more than 20,000 consumers across 34 countries
about their attitudes toward sustainability and social responsibility, and how these
beliefs influence shopping, investing, and career decisions.
For the second, we surveying 2,500 executives across 22 industries, delving into their
organizations’ ESG strategy, approach, and operationalization; what benefits they
expect from ESG initiatives; and how they weigh ESG against other business
objectives. (See Study methodology, page 26.)
When ESG is viewed as a vehicle for driving business value—rather than a narrow
reporting exercise—ESG generates insights that create opportunities and boost
performance (see “ESG is more than you think,” page 5).
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Transparent data can open the door to new markets, And the need for change is urgent: consumers are
business models, partnerships, and investments. increasingly skeptical of ESG claims. Only 20% of
In a tight labor market, transparency through ESG consumers say they trust the statements companies
can also help attract and retain top talent. It creates make about environmental sustainability, down from
opportunities with sustainability-focused partners half just two years ago (see Figure 1).3
and engenders loyalty with consumers.1
What’s causing this decline? A lack of progress is partly
Our research found that consumer commitment to to blame. Our survey found that, while 95% of organi-
sustainable development has intensified, even as zations have developed ESG propositions, only 10%
economic challenges hamstring purchasing power. have made significant progress toward their goals.
While more than half (51%) of our consumer Executives name inadequate data as the greatest
respondents say cost of living increases have made obstacle—even more of a hurdle than regulatory
environmentally sustainable and socially responsible barriers and inconsistent standards.
decisions more difficult in the last 12 months, roughly
This might be why about 6 in 10 executives say they
6 in 10 say at least half of their purchases were
make tradeoffs between financial and ESG objectives.
branded environmentally sustainable or socially
Without the ability to access, analyze, and understand
responsible in the same timeframe. What’s more,
ESG data, they can’t accurately predict which plans
nearly half have paid a price premium for environmen-
will both improve outcomes and deliver high ROI.
tally sustainable or socially responsible products in
Without data transparency, sustainable development
the last year.
remains out of reach.
And some companies are tapping into these opportu-
nities, converting ESG efforts into tangible business
value. They’re seeing higher revenue, improved profit- FIGURE 1
ability, deeper customer engagement—this list goes
A time of distrust
on—by approaching ESG as a transparency play that
creates strategic business opportunities. Consumer trust in corporate sustainability
statements has plummeted.
These findings build on recent IBV research, which
outlined how sustainability can drive transformation
for the enterprise. However, that research also showed 50%
a striking imbalance between ambition and action,
with organizations struggling to operationalize
40%
sustainability.2
But only a few companies have reached the next level. 2021 2023
Rather than strategically harnessing ESG data—using it
as a tool for identifying opportunities to innovate and 48% 20%
improve—many organizations are narrowly focused on
meeting immediate compliance demands. To deliver Source: 2023 Consumer survey Q26.4: I trust statements companies
better business results, leaders need to see ESG trans- make about environmental sustainability (yes or no); 2021
parency through a new lens. Consumer survey Q16.1: I trust statements companies make about
environmental sustainability (Extent you disagree/agree, 1-5,
4&5=agree).
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Perspective
The term “ESG” has been stretched within an inch of its life. It’s conflated
with sustainability in some instances, reporting metrics in others. In many
contexts, it’s spat out like a dirty word.
In this paper, we define ESG as something greater than its individual environ-
mental, social, and governance parts. We talk about ESG as a transparency-
enabler: a capability that validates a company’s ESG claims. In so doing, it
reveals into how performance can be improved and new value unlocked.
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Case study
Celestica embeds
sustainability
across operations
Software has helped streamline the process. Celestica can now compile and transform
data into usable outputs and help eliminate errors from manual data entry. Automation
of complex calculations and reporting produces finance-grade, auditable data.
This data and analytics capability will also allow Celestica to embed sustainability
across the organization. As noted by Jessica Peixoto, Sustainability Manager, Celestica
Inc.: “This governance model will trickle down into each team, tying sustainability into
all aspects of the business.”
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The case
for ESG
76% of executives Sustainability and ESG initiatives face heavy headwinds—from inflation
say ESG is central
to geopolitical upheaval. Some question whether good intentions will
to their business
strategy. wither in the face of a looming global recession. But our survey shows
that enterprises are doubling down.
Roughly three in four (76%) now view ESG as central to their business strategy and
more than 7 in 10 (72%) approach it as a revenue enabler rather than cost center. And
while most ESG efforts focus on compliance and risk management, many now expect
to see improved profitability (45%) and improved innovation (35%).
More than 40% even say they would be willing to accept a lower salary to work for an
employer that is environmentally sustainable or socially responsible—and nearly one
in four of those who changed jobs in the last 12 months say they did just that. Overall,
the salary cut people say they would be willing to accept is close to 20%.
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But individuals can’t always assess how companies perform on the factors they care
most about. While a broad set of ESG measures matter to consumers, roughly two in
three executives say they must make trade-offs between different ESG objectives.
Companies tend to focus on a narrower set of issues, often falling victim to carbon
tunnel-vision (see Figure 2).
FIGURE 2
Most important ESG information for consumers Most reported metrics by organizations
Child labor and forced compulsory labor 70% 2 46% Scope 1 GHG emissions, absolute
Water consumption and treatment 66% 5 38% Scope 1 GHG emissions intensity
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Three big
roadblocks
ESG goals are Why aren’t more businesses leaning aggressively into ESG?
meaningless if they
aren’t tied to real Almost three in four (72%) of our business respondents agree that ESG
performance data. needs to be a higher priority in their organization. Yet, getting there
requires a major mindset shift—and a commitment to overcoming the
barriers holding efforts back (see Figure 3).
FIGURE 3
Double threat
41% 39%
Regulatory
37%
Customer/
37%
Inconsistent
Inadequate barriers citizen resistance standards
data
01
9
Here are the three top obstacles organizations must address to deliver
more value with ESG:
1. Bad intel
Data is the lifeblood of ESG. It provides visibility into an organization’s operations,
letting leaders see where the business is reaching the bar—and where performance
has fallen behind. ESG goals for the future lose their significance if they aren’t tied to
current performance data. And without the right information, it’s impossible for
executives to assess the company’s impact, identify improvement opportunities,
or showcase successes.
Whether they’re assessing the carbon footprint of operations, labor practices across
the supply chain, or compensation practices, leaders need reliable, real-world
information to set achievable targets—and measure meaningful progress (see Large
European chemicals company uses an analytics platform to advance ESG goals, page
12). Yet, most of our executive survey respondents say their organizations struggle to
manage, manipulate, and map data (see Figure 4).
FIGURE 4
Operational opacity
01
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2. Too many standards 3. Skepticism and distrust
The ESG reporting environment is littered with The executives we surveyed say they’re being
acronyms. From the International Sustainability pressured from business partners, board members,
Standards Board (ISSB) and the Global Reporting investors, and creditors to provide greater trans-
Initiative (GRI) to the Task Force on Climate-Related parency around ESG initiatives. There is growing
Financial Disclosures (TFCD) and the EU’s Corporate frustration that ESG goals are not connected to
Sustainability Reporting Directive (CSRD), it’s difficult credible action plans and clearer signs of progress.
to keep up with the ever-expanding list of ESG
Our survey shows that consumers are also
disclosure standards, frameworks, and requirements.
demanding more:
In fact, there are more than 600 reporting provisions
globally, each offering its own interpretation of – Only one in three say they have sufficient ESG
sustainability and social responsibility—and how information to make sustainable investing
companies can prove they are meeting the bar. decisions.
This proliferation is creating confusion. When – Roughly 4 in 10 say they have enough data to make
companies report on a variety of KPIs that assess environmentally sustainable purchasing (41%) or
ESG performance from different angles, it becomes employment (37%) decisions.
harder for leaders to execute. Executives say that – 36% say they have sufficient information for
regulatory barriers and inconsistent standards are making socially responsible investment decisions.
two of the top challenges holding ESG efforts back.
– 38% have enough information to make socially
responsible employment decisions.
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Case study
Large European
chemicals company
uses an analytics
platform to
advance ESG goals
A large European specialty chemicals company was struggling with fragmented and
complex data of the product portfolio due to data silos and manual processing of
sustainability and emissions information. In addition, the company lacked accurate and
verified data, efficient data management, and a consistent methodology for calculating
and allocating carbon emissions. This significantly hampered ESG reporting efforts and
the ability to manage progress.
Turning the challenge into opportunity, the company is creating an advanced analytics
platform for transparent sustainability data management across value chains. The
platform provides a single point of truth for sustainability analysis data, creates greater
transparency, and provides faster insights from automation and analytics. Through
these insights, the company can not only meet reporting requirements, but also take
informed action for tangible improvements.
Looking forward, the company is looking to tap the platform to drive deeper sustain-
ability transformation. It plans to focus on planning, forecasting, and managing ESG
KPIs and building informed scenarios for how to advance the company’s top sustain-
ability goals.
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Four pillars
of success
ESG leaders are Rather than pigeonholing ESG into the realm of compliance and
43% more likely to
reporting, leaders that elevate its role can drive engagement,
outperform on
profitability—and inspire innovation, improve operations—and unify ecosystem
52% more likely to partners around shared strategic goals.
say ESG efforts
have a huge impact To do this, organizations should funnel data in two directions. Looking internally,
on profitability. embedding ESG data into operations to drive performance improvements. For
example, integrating emissions data into core operational or enterprise asset
management systems can help leaders reduce the company’s carbon footprint.
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Meanwhile, clarity on corporate governance can IBV research has identified a cohort of organizations
attract responsible investment funds or impact with higher maturity in four key areas that enable
investors. By opening the door to these opportunities, them to convert ESG to business value:
the ESG capability can become a platform and
– Data and ecosystems: The sourcing and
catalyst for driving transformational growth and
management of relevant ESG data across the
producing better outcomes (see Figure 5).5
organization and the partner ecosystem
To understand how ESG—framed within wider – Digital tech: Enterprise architecture for ESG and
sustainability efforts— can facilitate enterprise-wide the availability of ESG data in a clear dashboard
improvement, it’s useful to look to those businesses
– Process and business integration: Embedding ESG
that are making progress in practice. Their leadership
metrics across functions
offers a roadmap that companies across sectors
can follow. – Skills and decision-making: Adoption of new
practices and availability of relevant ESG and
sustainability skills
FIGURE 5
Ecosystem Innovation
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We found that organizations with greater maturity in So how do they do it? Let’s explore the four pillars that
these four ESG capabilities financially outperform underpin a successful, mature ESG operating model.
their peers. They have an annual rate of revenue
growth more than 10% higher than laggards and Data and ecosystems
generate 5% higher shareholder return.
With the right data framework in place, companies
ESG leaders are 43% more likely to outperform can assess current ESG goals, credibly estimate the
their peers on profitability—and 52% more likely to ROI of ESG initiatives, and manage compliance—even
attribute a very great impact of their ESG efforts on when reporting requirements shift. Having a clear line
profitability. More of them point to ESG as a driver of of sight into core operations is a lot more valuable
better risk management (+90%), greater access to than simply checking off compliance boxes. Take
finance (+85%), and a 21% greater improvement on energy consumption as an example. With clear data
their weighted cost of capital (see Figure 6). They on when, where, and why the business is using
also say ESG has a bigger impact on customer energy, leaders can optimize consumption and
engagement (+70%), ability to attract talent (+83%), reduce costs without disrupting essential business
and innovation (+72%). activity.
In terms of ESG outcomes, the group distinguishes ESG leaders are more than twice as likely than
itself on a broad set of goals: they report higher laggards to have made significant progress on estab-
reductions in greenhouse gas emissions, are 34% lishing enterprise-wide data governance for ESG and
more likely to outperform on corporate social respon- putting in place an enterprise-wide data warehouse.
sibility, and are 51% more likely to outperform on In addition, they’re 66% more likely to have made
diversity than their peers. significant progress in creating an enterprise-wide
system of record for ESG.
FIGURE 6
Customer
engagement 70%
more
56%
33%
Risk
management 90%
more
59%
31%
Access to
finance 85%
more
50%
27%
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These capabilities facilitate a shift in the nature and In addition, as many as 60% of leading organizations
role of ESG data, positioning it as a central resource have integrated their ESG efforts with their partner
for business value. Moving from past averages to ecosystem.
real-time actuals—from reactive analysis to proactive
To follow in the footsteps of ESG leaders, organiza-
modelling—enables greater transparency and can
tions must stop solely extracting and channeling
boost performance across the organization and the
data for reporting purposes and start viewing ESG
ecosystem.
data as part of a platform-enabled loop. This circular
Leading organizations are actively collaborating with approach provides the foundation for continued
their partners on ESG. Shared data governance and performance improvement and transformation. It
common definitions let these companies source ESG makes ESG data and metrics part of the feedback
data more successfully from their partners. loop that triggers adaptation and guides change.
And it facilitates engagement with ecosystem
partners on sustainability action (see Figure 7).
FIGURE 7
Business Business
unit unit
Stakeholders Stakeholders
& partners & partners
Data shared between
stakeholders and partners
for ecosystem collaboration
and open innovation
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Digital tech When asked which technologies are most important
for ESG, executives highlight the role of advanced
Leading organizations are far more likely than others
analytics in delivering ESG insights, and automation in
to have made substantial progress in advancing their
boosting the efficiency, accuracy, and scaled impact
technology for ESG transparency. They’ve made more
of ESG efforts (see Figure 8). For example, automating
significant strides in furthering the overall enterprise
manual data processes can make it faster and
architecture and integrating their ESG data into a
cheaper for companies to achieve transparency.
dashboard—and they’re 54% more likely to have
Applying advanced analytics can also pinpoint
developed a digital strategy that enables their ESG
improvement opportunities and support modelling
efforts.
that informs more sustainable decisions.
Leaders have also embraced the opportunities for
These technologies don’t operate in isolation but
scaling, accelerating, and augmenting ESG with
complement each other in driving improved
exponential digital technologies. For example,
performance. If executives look through a particular
leaders are 58% more likely than laggards to have
technology lens, rather than focus on how they can
developed the hybrid cloud capabilities for ESG, 33%
create the greatest impact, immense potential is left
more likely to have made significant progress with AI
on the table. Interactions among several technol-
for ESG, and more than twice as likely to have
ogies—and with other organizational capabilities—
progressed significantly with the use of advanced
enable and drive the improvements needed for
analytics for ESG. They are also 79% more likely to
moving the needle on ESG and sustainability.6
have made progress in the use of automation for ESG.
FIGURE 8
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Moreover, sustainability is a team sport. Tapping Skills and decision-making
insights across the ecosystem is essential to making
ESG data and insights need to filter through the
meaningful performance improvements—and
organization to inform real-time decision-making.
that requires an open technology architecture.
And the decision rights on sustainable action need to
Interoperability and open standards aren’t just
be distributed across the organization rather than
buzzwords. They’re crucial for digital technology to
centralized at the top.
provide the greatest lift for ESG transparency and
sustainability improvements. Change starts at the task level. For example, some
organizations use internal carbon pricing as a
Process and business integration mechanism to help justify investments that may have
To drive real improvement, ESG data and metrics an impact on carbon emissions, a practice that is, at
should be embedded into core operations, processes, least to some extent, being adopted by 24% of the
functions, and workflows. Such integration is key to organizations surveyed. Furthermore, as noted in our
weaving sustainability into day-to-day tasks and latest CEO study, some companies tie executive and
activities.7 non-executive compensation to meeting ESG
targets.9
ESG leaders are far more likely to have ESG metrics
incorporated into their innovation and digital transfor- Using ESG data and metrics to inform daily decisions
mation efforts and integrated into finance functions. can have an exponential impact on performance. But
The latter echoes recent IBV research highlighting for employees to actively use ESG data to advance
the important role of finance in supporting an organi- sustainability, they need to be both empowered and
zation’s sustainability efforts.8 enabled. People also need sustainability skills to
translate ESG data into sustainable action.
Across all organizations, the integration of ESG
metrics into core functions is limited, mostly focused Executives we surveyed say more than 30% of the
on risk management (44%), brand strategy (40%), workforce require sustainability skills today. And as
and customer service/engagement (39%). Only 20% the demand continues to grow, defining pathways for
are integrating ESG metrics into supply chain developing, accessing, and retaining relevant sustain-
operations; 26% into procurement and sourcing; and ability skills becomes critical. More than half (56%) of
just 11% into real estate and facilities management. executives cite high attrition of employees with
sustainability skills as holding back their sustain-
This offers a window into huge, missed opportunities. ability efforts.
Companies pursuing value-driven sustainability must
look for change opportunities that will create a ripple
effect. Their view should cut across traditional
functional silos and processes—unlocking opportu-
nities for rapid improvement at scale.
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ESG-enabled sustainability
must be facilitated from the
top down—with each executive
understanding their role.
In the context of ESG, the Chief Sustainability Officer (CSO) acts as the source of
continuity across the different areas of responsibility, working with different C-level
colleagues as appropriate (Figure 9). While the CSO role is often in flux, focusing on
different priorities at different organizations, many are moving into an orchestrating
position. Whatever goals the company aims to achieve, the CSO will be critical in
pushing sustainability forward.
FIGURE 9
Note: CSO = Chief Sustainability Officer, CIO = Chief Information Officer, CCO = Chief Compliance
Officer, CEO = Chief Executive Officer, COO = Chief Operating Officer, CMO = Chief Marketing Officer.
Source: Q31: C-suite responsible for the following ESG areas.
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People make
the difference
ESG success—or What will it take to move the needle on ESG transparency and
failure—is defined
sustainability performance? And how can leaders build on those
by the choices
employees and successes to boost the bottom line?
partners make
every day. It starts with changing human behavior. It is through thousands—or millions—of
daily actions that an organization’s sustainability strategy is brought to life. No CEO
statement or glossy report can make the same impact, regardless of how informed,
reliable, and compliant it may be.
And here lies the crux of the matter. Too much of the ESG debate has been focused
on funneling ESG information up the org chart. But not all ESG decisions are tied to
functions and rank. Many are tied to the choices individual employees and partners
make every day—choices that are influenced by the information they have at hand.
And this only becomes more important as environmental and social issues grow more
urgent. According to the World Economic Forum, most of the risks business leaders
expect to face in both the short- and long-term fall under the ESG umbrella.10
From pollution and resource consumption to social displacement and diversity pay,
organizations need to be ready—and able—to prove they’re doing what they say.
Businesses that build the right ESG capabilities will be prepared to update their
practices to meet shifting expectations and report on the metrics that matter most.
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Action guide
Driving sustainability through ESG transparency is a
journey of continuous improvement. Organizations
with more mature capabilities should not view their
position as an end-state but rather as a platform for
amplifying business value. Here’s how enterprises can
improve their situations and better prepare for the
marketplace of tomorrow.
01 02 03
Start moving. Be transparent. Be direct.
– Clarify your ESG objectives and – Source and migrate data from – Report on what is relevant from
what you are trying to achieve. across your enterprise into a single a materiality point of view, as
Align your ESG efforts to your system of record for ESG. well as what is required, without
business strategy and goals. obfuscation.
– Create a data platform and
– Map data needs against ESG integrated ESG dashboard for – Specify an action plan and
requirements. Determine what shared visibility and performance interim goals for meeting ESG
information you need and for management. targets. Be honest about where
what purpose. the organization needs to
– Share performance without
improve.
– Identify immediate and cherry-picking results. Be clear
pragmatic opportunities to make about data sources, quality, and – Activate the use of ESG data
progress. calculations underpinning ESG and insights for improved
KPIs. performance across the
enterprise and ecosystems.
For example, use pricing,
budgeting, and incentive
mechanisms based on
sustainability metrics and data.
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Action guide
04 05 06
Scale, automate, and Orchestrate the Capitalize
augment with abandon. ecosystem. on trust.
– Create APIs from enterprise – Align with ecosystem partners on – Define, build, and manage
systems to accelerate ongoing ESG definitions and standards. organizational capabilities and
data delivery to the ESG skills for ESG reporting and
– Don’t wait for others to lead.
platform. performance.
Proactively establish ESG data
– Automate ESG processes and governance principles with – Make change management and
reporting capabilities to keep stakeholders. stakeholder engagement an
data current. integral part of your ESG journey.
– Share ESG data and KPIs with
– Tap AI for enhanced insights into ecosystem partners and – Use your enhanced ESG posture
performance, predictive stakeholders for collaboration to build trust with consumers and
analysis, and scenario and co-creation. employees, unlock new market
development. opportunities, and grow revenue
through partnerships.
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About
the authors
Jacob Dencik, Ph.D. Jacob is responsible for leading the IBV’s research on
Chief Economist and Global Sustainability topics related to technology and implications on the
Research Leader, global economy. He has extensive experience advising
IBM Institute for Business Value companies around the world on their global
linkedin.com/in/jacob-dencik-126861/ operations. He has also advised governments as an
jacob.dencik@be.ibm.com expert and economist on competitiveness, foreign
direct investment (FDI), sector/cluster analysis, and
innovation. Jacob holds a Ph.D. in public policy and
economics from Bath University in the UK.
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contact the IBM Institute for Business Value at today’s rapidly changing environment.
iibv@us.ibm.com.
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Study methodology Notes and sources
The IBM Institute for Business Value (IBV) analyzed 1 Bastit, Bruno, Terry Ellis, Paul Munday, Bruce Thompson,
the results of two in-depth surveys. In the first, we Dennis Sugrue, Esther Whielden, and Jennifer Laidlaw.
“Key sustainability trends that will drive decision-making
surveyed more than 20,000 consumers across 34
in 2023.” S&P Global. January 26, 2023. https://www.
countries about their attitudes toward sustainability spglobal.com/esg/insights/featured/special-editorial/
and social responsibility, and how these beliefs key-sustainability-trends-that-will-drive-decision-mak-
influence shopping, investing, and career decisions. ing-in-2023
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