Most companies are still struggling to measure the financial consequences of environmental, social and governance (ESG) risks and opportunities, despite increasing awareness of the topic, KPMG said in the latest survey of 600 companies around the world. These results indicate that although the incorporation of sustainability concepts in corporate strategies is growing, only a limited portion of companies can count on tangible economic benefits for their actions, which poses a considerable risk in the decision-making and long-term planning of their businesses.

The report, which drew on answers from over 2,000 senior executives in 19 countries, revealed that businesses are taking steps to integrate sustainability into their business operations. Yet, currently, only 19% employ sophisticated financial valuation methods to evaluate the impact of sustainability projects on business value, operational efficiency and value creation for the future. The results reflect the continued gap between sustainability risk and financial analysis, even as more boards are focusing on ESG strategy.

Strong Awareness, Limited Financial Measurement

Closing the Sustainability Valuation Gap was based on a survey of C-suite executives and senior leaders from organisations reporting a turnover of more than $100 million across a broad spectrum of industries. 72% of respondents said they had a detailed understanding or familiarity of their organisation's sustainability strategy, performance indicators and key objectives.

The survey also indicated that sustainability is becoming a more integral part of corporate planning. About half of companies (60%) included sustainability concerns and opportunities in their financial planning processes and half of the respondents reported that sustainability is now part of their corporate strategy.

Even though this is on the rise, many companies have not yet developed effective methodologies to measure the impact of sustainability programmes on financial results. Awareness is not enough; businesses need to have credible valuation models that integrate sustainability into investment decisions, capital allocation and long-term growth strategies, wrote the KPMG team.

Gap Between Sustainability and Business Value

Less than one in five companies uses a financial valuation technique like digital twins, Monte Carlo simulation and more complex modelling to value the financial impact from sustainability related decisions, the report found.

Such tools can support organisations in quantifying the impact climate risks, operational enhancements, innovation, regulation and sustainability investments have on profitability and enterprise value. Otherwise, businesses could underestimate the impact of sustainability-related risks and the opportunities created by sustainable investments.

Many boards have come to accept that sustainability issues are important, but few organisations are doing well at linking the decision to address the issues to quantifiable financial results that can inform strategic decision making, commented Simon Weaver, Global Head of Sustainability Advisory KPMG International.

If one company didn't have a strong quantification approach, they might be missing out on some important downside risks and they might also be missing opportunities to create long-term value, he said.

There are some industries that are more advanced than others.

Significant variation was detected among different sectors with regard to the use of financial valuation techniques.

Banking and capital markets came in as the strongest, as 33% of companies said they used strong valuation practices to value sustainability's financial impact. Energy and natural resources came in at 31%, followed closely by automotive with 31% uptake of the technology.

KPMG's research found that these sectors have progressed faster due to sustainability concerns that are directly affecting their financial results and competitiveness in the long-term.

Kycassessment and regulatory stress testing of financial institutions increasingly need to consider climate-related risks in lending portfolios, credit exposure and in regulatory stress testing. In parallel, there are substantial investments needed by energy companies and the automotive industry in order to adapt to a lower carbon based business model, and financial analysis of sustainability efforts is becoming more crucial.

Inconsistent Frameworks is still a Challenge

The valuation gap was largely due to the lack of consistent frameworks that relate sustainability performance with financial results, KPMG said.

It highlighted that many organisations still do not have well defined value drivers and implementation of consistent methodologies for measuring sustainability-related impacts. Where quantification techniques are available, the businesses use ‘spaghetti’ approaches that are applied inconsistently between different business units or departments, reducing the value of comparison and strategic decisions.

Consequently, businesses can find it challenging to determine the impact of sustainability efforts on their operational resiliency, innovation, cost reduction, or long-term shareholder value.

“Going beyond regulation will require more than just a business case for sustainability action to be made stronger, it will also require meaningful progress from companies,” said Julie Vasadi, Global Lead for Sustainability Deals and Value at KPMG International.

Organisations that proactively assess and understand the financial impacts of sustainability will likely be in a stronger position to preserve enterprise value, boost competitiveness and discover growth opportunities, she added.

The rising demand for financial integration.The increasing demand for financial integration.

The survey highlights the growing need for sustainability to be put at the centre of financial decision-making processes and not just as compliance or reporting requirements.

Companies have to come up with more advanced approaches to assessing sustainability's financial effects as investors, regulators and stakeholders increasingly focus on both climate resilience and responsible business practices and long-term value creation.

KPMG found that organisations will need to develop their analytical skills, look to establish a common framework for valuing sustainability, and enhance the incorporation of sustainability information into financial planning processes to further close the sustainability valuation gap. These enhancements would otherwise make it more challenging for businesses to price risks properly, discover investment opportunities and stay competitive in an increasingly sustainability-conscious world economy.