Governance is emerging as an unexpected catalyst of environmental progress
Change is afoot in how the consumer industry approaches environmental sustainability. And it’s not just in how companies think of it—shifting from good corporate citizenship to understanding sustainability is a critical business risk and, for some, even an opportunity. But change is also apparent in how they are making progress, albeit in a slightly counterintuitive way.
This change is happening at a very good time. Amid increasingly urgent warnings from the scientific community about climate change and other ecological crises, consumer companies are facing a confluence of stakeholder demands. Examples of how they are responding include consumer product manufacturers, hospitality groups, auto manufacturers, and retailers seeking to reduce packaging and waste, constructing LEED certified buildings, introducing new electric vehicles, and selling upcycled me Also, witness the regular occurrence of yet another consumer company announcing long-term commitments to eliminate or offset emissions. As of last year, 21% of Forbes Global 2000 companies have made such commitments. Over 25% of signatories to The Climate Pledge for net-zero carbon emissions by 2040 are consumer industry companies.
But the pressure to do more continues to increase from all sides.
- Consumer demand: Almost six in 10 consumers have changed their behaviors to help address climate change. In March, 52% of consumers reported making a sustainability-based purchase within the previous four weeks. Thirty-four percent of those paid significantly more than an alternative.
- Employee demands: With the war for talent raging in the consumer industry, one quarter of employees say that they have considered switching jobs to work for a more sustainable company.
- Special interest groups: Many activist groups and nongovernmental organizations (NGOs) are shining a spotlight on company performance, including any disconnects between commitments and actual achievements.
- Access to capital: By 2024, funds tied to environmental, social, and governance (ESG) objectives will likely represent half of all professionally managed assets globally. That’s US$80 trillion in assets under management. Influential voices like Larry Fink, and activist investors, such as Engine No. 1, are pushing directly for change and greater stakeholder capitalism, citing sustainability exposures as a real business risk.
- Regulatory requirements: On March 21, 2022, the US Securities and Exchange Commission (US SEC) proposed requiring all publicly traded companies to disclose material sustainability data. If made final, it may also require disclosure of:
- Material emissions produced by a company’s suppliers
- Detailed plans for meeting public emissions reduction pledges
- Reliance on offsets
A hunger for good data
Managing stakeholders and driving toward tangible environmental outcomes takes data. The standards and systems for engaging with stakeholders on financial data are robust and have been in place for decades. That’s not the case with sustainability data. Despite having several useful reporting standards, methodologies, and management systems (e.g., ISO 14001), many companies still lack the ability to provide consistent, validated, and reliable sustainability data. Today, only 3% of consumer companies say they produce sustainability data that is as accurate and verifiable as their financial data (see “Survey methodology”).
The consumer industry is not unique in this regard. More than half of senior executives, in a separate study across industries, said that data availability and data quality remain their greatest disclosure challenges. Almost all (92%) are concerned about not having the adequate technology required to facilitate ESG disclosure requirements.
Consumer companies know they must change. Seven in 10 executives surveyed agree that sustainability needs the same rigor as financial reporting. But how can they get there, and what can be learned from the companies closest to reaching data parity?
Getting to E through G
Why do cars have brakes? To stop, yes. But brakes also help to navigate winding roads while keeping the momentum forward. They provide drivers what they need to maintain control, so that they can safely press the accelerator.
Given the confluence of pressures outlined above, it is no surprise that consumer companies are overwhelmingly focused on their environmental goals
As with brakes on a car, could a greater focus on governance enable faster environmental progress by creating the quality data needed to guide it? Could it also help to build trust with stakeholders, attract capital, and even grow revenue?
Good governance can enable the creation of quality data needed to improve accountability and ultimately speed environmental progress. Companies on the ESG journey that are making more progress on “E” by focusing on “G” are practicing what Deloitte calls Accountable Sustainability.
Accountable Sustainability is a governance-led approach that enables a company to transparently communicate environmental goals and subsequent actions in a verifiable manner, while building trust among stakeholders through reporting consistent, comparable, and measurable progress.
With one in every three companies surveyed saying an error could easily go undetected in their sustainability data, a move toward Accountable Sustainability can’t come too soon.
Evidence suggests a shift is underway. Many consumer industry executives indicate that their companies are beginning to adopt elements of good governance to become more accountable to stakeholders on sustainability. Those that do so are seeing good results. This signal is particularly strong among “Vanguards”—those companies closest to financial and sustainability data parity. We will unpack details on what sets these companies apart in a moment—but let’s first focus on the elements of good governance.
Looking for governance
Executives were asked to assess their company’s current standing on governance for sustainability. The results suggest an embrace of factors that enable accountability—in fact a far stronger embrace than originally anticipated.
Accountable leadership: Almost seven in 10 consumer companies surveyed say their board of directors is frequently engaged in sustainability discussions. Nearly six in 10 say that sustainability is integrated into management roles and responsibilities. Half of them connect executive compensation directly to sustainability performance.
Governance infrastructure: Consumer companies indicate they are making the necessary investments in infrastructure. Almost four in 10 say their companies are making significant or very significant investments. The largest share of those investments are in technology (39%) and process (38%), followed by people (22%). While such investment is good, over four in 10 respondents said they would also need significant changes to their culture as well to make progress on becoming more accountable for sustainability.
Strategic integration: Another area of strength for the industry—six in 10 respondents say their sustainability strategies are fully integrated with their business strategies. The same number claim that their sustainability risk strategies are fully integrated into enterprise risk management frameworks.
Transparency and engagement: Six in 10 say that their sustainability disclosures are prepared using leading standards. On a separate question, the International Sustainability Standards Board (including component precursors currently being integrated) was most frequently mentioned in the response set. Six in 10 said sustainability was a regular part of their overall investor engagement. Over half claim to include sustainability disclosures in their formal filings (like proxy, 10-k). The SEC may require this of all public companies, so this number is likely to increase soon.
Independence: Almost seven in 10 companies have internal audits annually to review their sustainability governance, processes, controls, and data. Over six in 10 respondents say their companies use external auditors to obtain assurance for their sustainability disclosures.
The best versus the rest
The apparent embrace of governance is encouraging. However, the industry has such a long way to go to meet net-zero emissions and other environmental sustainability goals, it’s likely best to approach the finding with some skepticism. Self-assessments may rely on different definitions, standards, and impressions of progress, especially within a field undergoing pressurized change. So, we dug a little deeper.
To stress-test the findings, including the role of data and governance, as well as to see what sets the most accountable companies apart, we looked at the subset of companies that are closest to having sustainability data on par with financial data. Ninety-three companies in our survey indicate that they will achieve sustainability data parity within the next 18 months. We classified these as “Vanguards,” labeling the rest as “Followers.”
Leadership, infrastructure, integration, transparency, and independence—as would be expected, Vanguards embody more elements of good governance and accountability than their Follower peers, who are farther behind on data parity. Their boards are more regularly engaged, and executives more directly incentivized. They are more likely to recognize the importance of governance infrastructure, sustainability plays a larger role in their investor engagement, and they have deployed more oversight. One exception area is integration—risk and management roles—where Vanguards underperform on a relative basis. However, that result may be due to in part to the vast majority of companies in the entire survey claiming to have already achieved a high level of integration (76%), making it a less differentiating factor (see “Evolving motives and methods”).
But Vanguards distinguish themselves in other important ways.
- Meeting goals faster: 77% are formally committed to achieving net-zero before 2050 (30 percentage points higher than Followers).
- Investing more resources: 43% are making a significant or very significant investment in becoming more accountable (17 percentage points higher).
- Majoring on technology: While Followers are directing more resources to process, 43% of Vanguards are focused on technology investments (11 percentage points higher).
- Getting outside help: 55% use a third party for assurance over their sustainability reporting process and/or results (11 percentage points higher than Followers).
Courtesy Deloitte. Click here for full report.