Dive Brief:
- Amid enhanced scrutiny of ESG initiatives and mounting regulatory pressure to report on its financial impact, a new KPMG study pointed to a strong correlation between 21 ESG-related indicators and robust financial performance.
- The accounting firm looked at more than 2,617 companies across 18 industries and 61 countries using 2022 data from the London Stock Exchange Group (formerly Refinitiv) and carried out a statistical comparison of the difference in financial performance between companies with varying levels of sustainability investment, subject to a control variable.
- Sustainability indicators deemed to have a “significant relationship with gross profit margin” included lower carbon dioxide emissions; land environmental impact reduction; business ethics policies; staff transportation impact reduction initiatives; day care services for employees; and a high percentage of female executives.
Dive Insight:
Examining the return on investments from sustainability initiatives has emerged as a major priority for CEOs, especially as senior executives expect to see returns from their firm’s ESG investments. Among CEOs polled in the 2024 KPMG U.S. CEO Pulse Survey, 74% said they expected to see significant returns on sustainability investments over the next five years.
The results, according to KPMG, don’t necessarily establish a causal relationship between sustainability outcomes, investments and financial outcomes, but estimates correlations that might offer useful insights for business leaders.
“A key challenge sustainability practitioners face is measuring the impact of their work on financial performance,” Rob Fisher, KPMG’s U.S. sustainability leader told ESG Dive in a statement. “Sustainability practitioners are not alone in this challenge, but it's critical businesses better focus their sustainability efforts to gain a competitive advantage.”
Though the findings aren’t causal, analysis from the study can “pressure test” strategic thinking as sustainability leaders design and update their approaches, he added.
Julie Gorte, senior vice president for sustainable investing at Impax Asset Management, told ESG Dive that the study was a “good faith attempt to start to understand the quantifiable financial impact of sustainability related matters.” However, she said the analysis was limited by its use of independent sustainability variables, data from one service provider, and that most of the variables were binary (e.g., yes-no). Gorte also noted the study didn’t look at other aspects of financial performance, including EBIT, Tobin’s Q, return on assets, return on equity, spreads, stock price and access to finance or terms of finance.
Gorte pointed to how the time span of the study — which only focused on 2022 — could also affect the results.
“That was the year Russia invaded Ukraine, and sent fossil fuel prices skyrocketing, so anything related to carbon emissions would be expected to have underperformed at the end point in the data series, as companies in the energy sector performed very well as a result,” she said.
The year of 2022 also brought about domestic discord within the U.S. with the Supreme Court striking down Roe v. Wade, impacting abortion rights nationwide; the occurrence of several mass shootings, including Uvalde, Texas; and market volatility spurred by the COVID-19 pandemic — all highlighting social issues.
In its report, KPMG acknowledged that reporting bias may be at play: The study looked at companies that report on sustainability metrics collected by LSEG, and those with unflattering metrics may choose to not disclose that information.
Rather than focusing on the conclusions of one individual study, it’s more important to look at trends in the literature collected on the topic over time, Gorte said.
“Within my database of approximately 1,100 studies, there are many different ways of measuring sustainability, a lot of different dependent variables, many different types of regressions, event studies, and attribution analysis — and that generally shows that sustainability is associated with better performance more often than not,” she said.
Though not commenting on the KPMG study specifically, Kristin Moyer, research vice president and analyst at Gartner, said each study on ESG moves the needle on helping organizations understand the relationship between sustainability initiatives and financial performance.
“It's just very difficult to measure. Correlation is not causation,” she said. “There’s a lot of things that will cause one firm to perform better over others, even if they're doing close to the same thing.”
