For many businesses today, the desire to comply with environmental, social and governance (ESG) requirements doesn’t line up with the resources they’re devoting to that effort. 

“Ninety-three percent of Global 2000 companies with net-zero [carbon emission] commitments say they will miss targets based on their current trajectory,” said Etosha Thurman, chief marketing and solutions officer for intelligent spend and business network with SAP, citing a recent report by Accenture. She chaired a panel on ESG accountability at SAP’s recent Spend Connect Live conference in Vienna, Austria.

There’s no lack of awareness within industries of the importance of addressing ESG issues. Seventy-eight percent of respondents to a survey by Vizbl on decarbonization readiness said it’s important to reduce Scope 3 emissions — those generated by supply chain partners over whom the original equipment manufacturer or ultimate buyer has no direct control. Yet only 8% are making any progress toward that goal, Thurman said.

Why the disconnect? It’s simply a matter of budget priorities. Patricia Miller, interim chief procurement officer with Accenture, told the SAP panel in Vienna that procurement organizations are struggling with a slew of new environmental regulations being enacted by countries around the world. “I hear [them say], ‘I want to do something, but nobody wants to give me money for it.’”

Peter Selfridge, executive vice president and global head of government and public affairs with SAP, said there’s a heavy price to be paid by companies that skimp on spending to conform to ESG laws. New rules will impose an estimated $300 billion in carbon-pricing penalties on companies that fail to comply by 2025, he said.

Ramon Zumarraga Gorostiza, purchasing services director with Iberdola, a Spanish multinational electric utility, said he had “no budget” for soliciting reports from suppliers about the status of their emissions-reduction efforts. And the cost will only rise as regulators begin mandating that procurement organizations reach beyond their Tier 1 suppliers.

Selfridge likened the situation to the European Union’s imposition of a strict consumer data-protection rule in 2018. At the time, he said, “everyone panicked,” but companies ended up scrambling to comply. A similar scenario could play out this fall, when the U.S. Securities and Exchange Commission issues new climate-related disclosure rules.

“It’s going to take time [to comply],” Selfridge said, “and time is not something we really have.”

Yet budget realities persist, thanks to companies being reluctant to spend up front on programs that won’t yield an immediate return on investment. (One would think that the threat of $300 billion in penalties in just two years would be enough to incentivize boards and C-suites to act, but apparently they don’t agree.) “It’s hard to have that conversation,” Thurman said. “There’s no altruism in business. If there’s not a dollar sign or Euro sign, it doesn’t get done.”

Executives polled about their spending priorities typically cite cost-containment, supply stability and talent ahead of sustainability. Thurman says many companies lack the metrics to assess supplier progress toward carbon reduction. 

“If you truly want to change behavior,” Miller said, “you have to measure it. And it must be shared by more than the procurement function.”

The problem lies deep within organizational behavior. Executives and managers are incentivized to reach specific performance goals. Gorostiza said just 10% of executive compensation is based on how companies are meeting their ESG targets. Thurman said top management is failing to offer this “carrot” to managers, so compliance becomes solely a matter of avoiding the ”stick” of penalties.

Muhammad Alam, president and chief product officer of SAP’s intelligent spend and business network, frames it as an issue of supplier visibility. But it’s difficult enough to achieve that goal with Tier 1 partners, Alam said at the SAP event, and only a limited number of companies have managed it with Tier 2 and beyond. The best that many can do today is obtain actual numbers from their immediate tier of suppliers, then rely on averages for the rest. The goal of getting down to the so-called “N” tier — all the way to the sourcing of raw materials — “is still largely unsolved and untapped,” he said. 

The outlook for near-term ESG compliance isn’t entirely negative. The kind of visibility that companies seek in reducing carbon emissions throughout the supply chain ends up delivering benefits that square with higher executive priorities, including supplier stability and cost containment. So a return on investment from ESG initiatives could arrive sooner than they think. In any case, doing nothing about ESG at this late date isn’t an option. Said Thurman: “The next step is to take action.”

Next: So what are companies spending money on?