A significant majority of large companies are not yet at advanced stages of readiness to meet upcoming assurance requirements on their reported ESG data, improving only slightly since last year, with a growing gap between the most and least prepared, even as virtually all companies acknowledge that they will be required to provide disclosures under at least one new sustainability reporting standard within the next two years, according to a new survey released by global professional services provider KPMG.

The report marks the second set of findings from KPMG’s ESG Assurance Maturity Index, following an initial survey in October 2023. For the new report, KPMG increased the size of the survey to senior executives and board members at 1,000 companies, up from 750, including respondents across a broad range of regions and industries, and with average company revenue of $19 billion. The ESG Assurance Maturity Index assesses preparedness across a series of factors ranging from governance, skill, and data management to digital technology and value chain, assigning each company with an index score of 1 – 100. For the report, KPMG classified companies in the bottom 25^th percentile as “Beginners,” those in the top 25^th percentile as “Leaders,” and those in the middle as “Advancers.”

The report comes as 100% of companies surveyed anticipate being required to provide ESG disclosures under at least one, and often multiple, sustainability reporting standards over the next 1-2 years, including the IFRS Foundation’s International Sustainability Standards Board (ISSB) standards, the EU’s CSRD and the U.S. SEC’s climate rules. Aside from the regulatory requirements, the companies broadly reported feeling increasing pressure to provide ESG assurance from stakeholders including shareholder activists, cited by 57% of respondents, up from 49% in the prior survey, financial markets (48% vs 37% prior), and investors (48% vs 43% prior).

The survey found a sharp increase in sustainability reporting activities by the companies even over the past few months, with 77% of respondents indicating that their companies are now reporting publicly on their ESG performance, up from only 56% in October 2023. Additionally, companies are now externally reporting on an average of 10.8 ESG metrics, more than triple the number (3.4) reported last year.

As regulatory and stakeholder pressure to provide externally assured sustainability reporting grows, the study found that companies’ preparedness is increasing, but only slowly, with the average maturity index score increasing slightly since the prior survey to 47.6 from 46.5, and the share of leaders rising to 29% from 25%.

The report found differences in ESG assurance preparedness by company size, region and sector. Larger companies, with revenues greater than $10 billion, for example, are well ahead of their smaller peers with less than $5 billion, with average scores for each group of 55.1 and 39.3, respectively. Financial services sectors were the most advanced, with Insurance and Banking each scoring over 52, while Life Sciences & Healthcare and Infrastructure scored lowest at 44.3 and 43.2 respectively. North American companies were the most advanced, at an average 49.4 score, followed closely by their European peers at 48.8, while Asia Pacific and Latin American companies lagged at 45.6 and 43.9, respectively.

While overall readiness to provide ESG data assurance is gradually improving, however, the study also found a growing gap between the most and least advanced companies. Notably, while companies in the “Leaders” category saw their average preparedness scores improve to 67 from 64.8 in the prior survey, and “Advancers” improved slightly as well, “Beginners” actually pulled back, with average scores falling to 28.9 from 30.5.

One of the most significant differences found by the study between Leaders and Beginners was each group’s use of ESG data systems. 98% of Leaders reported that their companies are now using either an integrated GRC system or a bespoke ESG management system to gather and report EG data, while 84% of Beginner respondents said that they at least partially rely on spreadsheets for ESG analysis and reporting.

Leaders were also found to be more likely to be increasing sustainability demands in their supply chains, with 93% reporting having set broad or robust ESG requirements on their suppliers, up from 83% in the prior survey, and compared to only 14% of beginners.

The report also found that leaders were more likely to be reporting increasing benefits from advanced ESG assurance maturity, including an 18 percentage point increase in the number of Leaders citing decreased costs, a 12 percentage point increase in those reporting better product and service quality, and an 11 percentage point increase in those citing reduced business risk. On average, Leaders cited 7.9 specific benefits, while Beginners reported only 5.6.

The study also explored the challenges facing companies in improving ESG assurance preparedness, with a lack of internal skills as the most commonly cited barrier, reported by 44% of respondents, followed by poor supplier ESG performance at 43%, complex reporting requirements at 41%, and unclear, evolving regulations at 41%.

With companies citing a skills gap as the top challenge to ESG assurance readiness, many are taking action on upskilling, with 96% of companies reporting performing ESG training either annually (36%) or throughout the year (60%), and 54% reporting plans to hire ESG talent externally.

Larry Bradley, Global Head of Audit at KPMG, said:

“Getting ready for ESG assurance is a journey – and companies are finding that, the further they get in that journey, the more there is to do and learn. The goal-line is continually evolving. That is why progress may appear slow, even though many companies have truly been taking significant steps. This effort will pay off – Boards are increasing their focus on it and Leaders are reporting a growing range of benefits as the discipline involved in getting ready for ESG assurance permeates across systems, processes, controls and governance.”

Click here to access the survey.