Why Companies Aren’t Living Up to Their Climate Pledges

Organizations are making firm commitments to sustainability. However, new research conducted by LEK Consulting suggests many of these organizations are struggling to deliver on their commitments. Setting and balancing priorities is the main sticking point. Fifty-eight percent of executives said there are “significant differences of opinion within the leadership team” on balancing short-term priorities with long-term ESG goals. Boards and executives are aware of these risks, but often lack metrics or KPIs to track progress. Only a quarter (27%) of companies have any enterprise wide ESG KPIs in place, and fewer still have a full set in place (just 3%). Without such metrics, companies will continue to struggle to align executive remuneration with ESG targets. The authors offer five remedies to help companies get back on track: develop a shared vision for sustainability; invest in education to drive needed understanding and skills through the company; analyze both financial and non-financial factors related to strategic choices; establish KPIs; and tie executive compensation to sustainability targets.

Organizations are making firm commitments to sustainability. More than 700 of the largest 2,000 publicly traded companies have made net zero commitments, with 59 of the FTSE 100 committing to net zero emissions by 2050. Two-thirds of the S&P 500 have set emission reduction targets of some kind.

However, new research conducted by my firm, LEK Consulting, suggests many of these organizations are struggling to deliver on their commitments. To map the extent and nature of this new level of sustainability challenge, LEK Consulting surveyed 400 global C-suite and senior executives of companies in a range of industries and at a variety of scales, including 28% with annual revenue over $10 billion. We found that 51% of leaders reported that they were willing to trade off short-term financial performance to achieve their long-term sustainability goals. But 58% report their organizations are unable to agree on what the tradeoffs should be.

Indeed, our survey found that the more leaders try to operationalize sustainability, the more they find their organizations are ill equipped for the task — out of alignment and lacking essential skills and metrics. The problems are internal. The sustainability distress call is coming from inside the house.

Hearts in the Right Place

Our survey confirmed that organizations are serious about sustainability. Public company executives (54%) are even more willing than the overall survey population (51%) to address ESG issues even if that reduces short-term financial performance. Fifty-one percent of the leaders surveyed view ESG as a growth driver. Another 20% focus on it in the context of innovation.

They are backing up their commitment with investment. According to survey respondents, the major focus for action and investment over the next five years is “sustainable services/products and their distribution.”

With all that at stake, it seems odd at first glance that organizations aren’t reporting better and faster progress. But they are not, and the reasons quickly become evident. The problem is lack of alignment — with external stakeholders and within the leadership team.

Setting and balancing priorities is the main sticking point. Fifty-eight percent of executives said there are “significant differences of opinion within the leadership team” on balancing short-term priorities with long-term ESG goals.

These internal differences reflect how much is at stake and how difficult the reporting burden can be. Putting sustainability at the heart of strategy requires analysis of financial and non-financial benefits of the strategic choices to achieve ESG goals, as well as an understanding of the many risks — energy cost, supply chain factors, risk risks, and risk to reputation — inherent in ESG reporting.

Boards and executives are aware of these risks, but often lack metrics or KPIs to track progress. Only a quarter (27%) of companies have any enterprise wide ESG KPIs in place, and fewer still have a full set in place (just 3%).

Without such metrics, companies will continue to struggle to align executive remuneration with ESG targets. Leaders acknowledged that linking executive compensation to sustainability targets will be a key step in achieving ESG goals, but too few companies are at this point yet.

An Array of Hurdles

Lack of alignment is not just internal. Asked about barriers to sustainability, 33% cited a lack of alignment within the leadership team but 34% cited a lack of strategic alignment externally, across key stakeholders

And there were other factors. Thirty-three percent reported that the barrier was that the organization lacked the right culture or mindset. Thirty-three percent blamed a lack of relevant capabilities and skills for clear decision-making and accountability.

When asked “What is the key area where your organization is least prepared to deliver your ESG goals?” 43% cited reward and incentive frameworks, and 40% cited “the right culture, including tone and engagement from the top.”

Among other challenges:

  • 79% of executives said the organization has more to do to put the required skills and capabilities in place.
  • 59% said their company has not made substantial progress in understanding the financial risk and opportunity posed by climate.
  • 54% said their company has not made significant strides in integrating ESG factors into the way the company allocates capital.
  • 48% said they do not think their company’s current product and service portfolio meets the needs of a more sustainable future.

Five steps that leaders can take to accelerate — and operationalize — sustainability programs

With all of those factors standing in the way of progress on sustainability, what is to be done? Leaders should:

  • Drive strategic alignment. Work to establish a common language for sustainability initiatives, develop a vision and goals, and understand and articulate the strategic choices required to achieve those goals.
  • Invest in education. Seek — and spend on — third-party support, including from established educational institutions and programs, to further drive alignment and build needed skills.
  • Assess strategic choices. Analyze both the financial and non-financial benefits of each choice that helps achieve ESG goals. Engage the full leadership team in the process.
  • Establish KPIs. Define what is required to achieve the goals and targets. Set KPIs that enable measurement. Establish data capture capabilities and systems to enable reporting and tracking.
  • Align remuneration. Once the sustainability vision and goals are set, interim targets are established, and KPIs are in place, then align compensation to the KPIs to reward sustainability progress and performance.

The stakes for sustainability performance are high. Expectations — on the part of investors, regulators, partners, customers, consumers, and the community — are only going to intensify. Leaders who understand the opportunity, as many seem to do, now need to take the next steps, definitively connect sustainability to strategy, and reap the tangible gains in growth and value that a fully operationalized sustainability program can deliver.

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