Sustainability Has a Finance Problem, Not an Awareness Problem, KPMG Says

Key Takeaways

• Executive Awareness Has Outpaced Financial Measurement: While 72 percent of executives understand their organization's sustainability strategy, only 19 percent report using robust methods to quantify its financial impact.
• A Valuation Gap Persists: KPMG says many organizations still lack credible ways to connect sustainability initiatives with enterprise value, EBITDA, cash flow, capital expenditures and financial risk.
• Poor Quantification Creates Business Risks: Without investment-grade financial analysis, organizations may reject commercially valuable sustainability projects or underestimate the cost of inaction.
• Finance and Sustainability Remain Disconnected: The report identifies a persistent divide between sustainability and finance functions as a key obstacle to better capital allocation and strategic decision-making.

Deep Dive

For years, the complaint was that boards did not understand sustainability. KPMG's latest research suggests that argument has largely expired. The problem now lies somewhere less visible and, perhaps because of that, more difficult to solve. Executives understand the risks, and they understand the opportunities. What many still cannot do is express either in financial terms that withstand scrutiny inside the investment committee or the finance function.

That's what KPMG's new report is about, which argues that sustainability has earned a place in corporate strategy but has yet to earn a consistent place in the models that determine where capital flows, how businesses are valued and which projects ultimately receive approval.

The firm's survey found that 72 percent of executives have either a detailed understanding of their organization's sustainability strategy, metrics and performance or are familiar with its key elements. Six in ten said sustainability-related risks and opportunities are considered during financial planning. Half said sustainability is integral to corporate strategy, while 40 percent reported integrating it into innovation and product development.

Then the numbers change. Only 19 percent of executives said their organizations use robust quantification approaches to measure sustainability's effect on financial outcomes, operational performance and innovation.

That gap, KPMG argues, is more than statistical. It helps explain why sustainability initiatives often struggle to survive financial scrutiny even when they create commercial value over the long term. If organizations cannot demonstrate how reducing climate risk, strengthening supply-chain resilience or investing in sustainable operations affects earnings, cash flow, capital expenditures or enterprise value, those initiatives can appear discretionary rather than economically necessary.

Where Sustainability Meets the Spreadsheet

The report repeatedly returns to what KPMG describes as a missing bridge between sustainability and finance. Many organizations, it argues, have become increasingly sophisticated at identifying sustainability-related risks and opportunities. Translating those insights into the language of corporate finance remains another matter. Few companies have developed credible ways to connect sustainability initiatives to measures such as EBITDA, cash flow, capital expenditure impacts, balance-sheet exposure or realistic ranges of financial risk.

The result is a disconnect between sustainability business cases and enterprise value. In many organizations, KPMG suggests, that separation is mirrored by the relationship between sustainability teams and finance departments, each working with different assumptions, different metrics and, ultimately, different definitions of value.

It is not simply an accounting issue. It becomes a governance issue because investment decisions increasingly depend on evidence that sustainability teams cannot always present in forms finance leaders are prepared to use.

The Cost of What Cannot Be Measured

The report argues that failing to quantify sustainability creates a blind spot rather than merely an information gap. Projects capable of reducing future risk or creating long-term value may struggle to secure investment because their financial benefits remain difficult to demonstrate. At the same time, organizations may approve acquisitions, capital investments or operational decisions without fully accounting for sustainability-related risks that later erode value.

KPMG argues that the question executives increasingly need to answer is no longer whether sustainability matters. Instead, it is far more practical: What do we gain financially by addressing this risk or pursuing this opportunity, and what does inaction cost?

Those questions remain difficult because widely accepted methods for translating sustainability-related risks and opportunities into financial planning and enterprise valuation have yet to emerge. Existing quantification techniques, the report says, are fragmented, inconsistent and often insufficient for investment decisions.

That challenge goes beyond KPMG's own research. The International Sustainability Standards Board requires companies applying its sustainability disclosure standards to explain the anticipated financial effects of climate-related risks and opportunities. At the same time, the standards acknowledge the practical difficulties organizations face by providing relief where measurement uncertainty, limited data or the long-term nature of climate impacts make quantification difficult.

From Reporting Requirement to Investment Decision

For KPMG, the next stage of sustainability is unlikely to be defined by additional disclosures alone. The report argues that organizations need valuation approaches that are fit for purpose and methods capable of estimating the financial effects of sustainability-related risks and opportunities, assessing the return on investment from mitigation efforts and making the cost of inaction visible before those costs materialize.

That, in turn, depends on investment-grade, decision-useful data that finance teams can incorporate into capital allocation, strategic planning and valuation models.

The report ultimately suggests that executive understanding is no longer the primary constraint. Companies know considerably more about sustainability than they can currently prove in financial terms. Closing that gap, KPMG argues, may determine whether sustainability remains principally a reporting exercise or becomes part of the way organizations decide where to invest, what risks to accept and how they define value itself.

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