Even as the acronym “ESG” takes a backseat or disappears from corporate reports and press releases in the U.S., the broader idea of sustainability continues to be prioritized both by domestic companies and their overseas counterparts.

Federal priorities are shifting, certain programs are being eliminated and organizations are talking less publicly about ESG, but customers, partners and investors still want to buy from, work with and invest in responsible companies. States like California, Colorado and Washington are also expanding their own ESG reporting and disclosure requirements as federal policy heads in a different direction.

Translating those commitments into financial terms that companies can use in decision-making is the new challenge—one that many organizations haven’t yet figured out. A new KPMG survey found that while many organizations have sustainability strategies in place and include them in planning, most still can’t quantify the impact on profits, cash flow or valuation. In fact, the survey found that while 72% of executives understand their organization’s sustainability strategy, only 19% can calculate how it will affect their firm’s future financial performance.

It Started with Who Cares Wins

In all fairness, sustainability has always been difficult to quantify. A company that installs an auto-boxing line in its warehouse can count how much less corrugated material and dunnage it uses, for example, but it may not know whether right-sized boxes with less filler improve customer retention. A company that switches to paper straws and eliminates plastic across its corporate campus can track the reduction in plastic use, but probably can’t connect that decision to financial performance.

That disconnect has been around since ESG entered the business lexicon in 2004 with the release of Who Cares Wins, a UN Global Compact report calling for environmental, social and governance issues to be incorporated into investment decisions. More than two decades later, many companies are still struggling to connect those commitments to profits, cash flow, capital spending and valuation.

In its new Closing the sustainability valuation gap report, KPMG puts a bright spotlight on the disconnect between sustainability strategy and financial decision-making. Based on a survey of over 2,000 executives in 19 countries and territories, the study found that sustainability is now firmly on the boardroom agenda, with 60% of organizations considering sustainability risks and opportunities in financial planning, and half of them embedding it into their core strategies.

However, KPMG says few organizations have succeeded in translating sustainability into financial metrics such as EBITDA, cash flow and capital expenditure impacts, challenging whether it is considered in financial planning, and creating a disconnect between sustainability initiatives and enterprise value. “As a result,” KPMG said in a press release, “companies risk overlooking both the cost of inaction and the potential value creation opportunity of sustainability investments.”

Turning the Tide

Boardrooms worldwide broadly understand sustainability-related risks and opportunities, but KPMG says this still hasn’t had a tangible impact on financial decision-making. Here are some survey results to back that up:

• 72% of executives have a detailed understanding of their sustainability strategy, metrics and performance, or are familiar with the key aspects.
• 60% consider sustainability-related risks and opportunities in financial planning.
• 50% say sustainability is an integral part of their strategies.
• 40% integrate sustainability into innovation and product development.
• But only 19% use robust quantification approaches to measure how sustainability impacts financial outcomes, operational gains and innovation.

With macroeconomic headwinds, geopolitical shocks, climate impacts and rising stakeholder expectations all impacting revenues, margins and the cost of capital right now, KPMG says it’s time to recognize sustainability for what it really is: a way to strengthen growth resilience and improve capital efficiency, but only when it’s properly quantified and embedded into both business strategy and financial planning.

“Companies that take the initiative now will be better prepared to protect and create value and competitive advantage at their own organizations,” the firm points out. “When it comes to sustainable value creation, leadership is not just about waiting for the herd to move; it’s about acting early in the face of inevitable change.”