Will confident CEOs lead firms toward greener future?

The COVID-19 pandemic has greatly increased uncertainty for the global economy. For CEOs, however, it is part of their daily job to make tough decisions in an uncertain and changing environment. To understand how the economy is recovering from the pandemic, looking through the lens of CEOs could provide useful insights.

In KPMG's 2021 Global CEO Survey which was recently completed, we asked over 1,300 CEOs from 11 major economies, including 125 from China, on how they see the recovery and how they want to grow their business. The survey gave us some interesting observations, especially takes from China CEOs. First, their confidence has generally rebounded from last year, in line with their global counterparts. Second, there is a clear emphasis on strategy and risk prioritization toward enhancing corporate reputations, ESG, supply chains and technological innovation.

Rebounding confidence

Corporate confidence has greatly improved in China. With the pandemic largely under control and vaccinations continuing to rise, the Chinese economy has been on a steady recovery path. For surveyed China CEOs, not only has their confidence greatly improved since the second half of last year, it now even surpasses pre-pandemic levels－a remarkable turnaround. Their optimism is also echoed by their global counterparts. For the first time since January 2020, more than half of global CEOs are confident about growth prospects of the global economy.

There are, however, still challenges ahead. Despite general improvements, corporate optimism retreated slightly beginning early this year. It is a stark reminder that the recovery is still affected by the pandemic, especially with the outbreak of the highly transmissible Delta variant.

In addition, global recovery has been uneven. While the share of the population that has been fully vaccinated now exceeds 60 percent in many advanced economies, it has remained in single digits in low-income economies. Many countries are still struggling to secure enough vaccines. As accurately put by the latest IMF's World Economic Outlook, "The pandemic is not over anywhere until it is over everywhere."

Top risks

The top three risks identified by the China CEOs are reputations, climate and environmental changes, and supply chains.

Reputation and brand image are critically important corporate assets without which companies cannot gain stakeholder trust. In today's highly connected and digitalized society, where good or bad news can seemingly go viral in a split second, the perception of a company's brand and reputation can change overnight. In my personal observations, companies in China are learning rapidly about reputation crisis management and strengthening their capabilities in this regard. Over the long run, however, this is not enough. Corporate leaders also need to balance diverse demands from various stakeholders to build a lasting, purpose-driven culture in order to successfully engage with employees, customers, investors and communities.

Climate and environmental change, often referred to nowadays as a critical component of the broader ESG (environmental, social and governance) agenda, is another risk that remains closely watched by Chinese CEOs. This risk has persistently ranked at or near the top in our surveys for the past three years. Many CEOs indicate that if they are unable to meet stakeholder expectations regarding climate and environmental change, they risk seeing reduced employee engagement, challenges in accessing capital markets and losing their competitive edge.

Supply chain risk is another area that corporate leaders pay close attention to. Globalization has enabled companies to shift production to different parts of the world, significantly increasing efficiency and reducing costs. Intermediate goods now account for about 60 percent of total global trade. However, stronger interconnectivity has also increased potential risks when parts of the supply chain break down. For example, automotive sales in China have slowed in recent months and dropped about 20 percent year-on-year in September. One of the reasons for the slowdown was chip shortages faced by automakers, which has been exacerbated by production disruption in some Southeast Asian countries caused by new pandemic outbreaks.

Growth

In the face of significant challenges, what are the growth initiatives that China CEOs are taking? First and foremost, they believe continuous innovation of their existing business is key. In our survey, over one-third of Chinese CEOs selected organic growth as the most important strategy to achieve their organization's growth targets. This includes increasing investment on R&D, offering new products and services, and hiring more people to strengthen innovation capability. When we talk to senior business leaders, the issues we discuss the most often are how to accelerate their digital transformation and how to increase the value-added component of their products.

CEOs recognize that competition often comes from new players outside the traditional domain and from disruptive new technologies. That is why they are increasing their investment in innovation detection and setting up accelerators or incubators for creative startups. In addition, technological breakthroughs often require interdisciplinary research and need organizations with different know-how to work together. That is why many CEOs say they want to join bilateral alliances or even multidisciplinary consortia with other companies to collaborate on developing new technologies. Large companies, small and medium-sized enterprises, as well as research institutes and universities should join such efforts and contribute their diverse expertise to build up a healthy innovation ecosystem.

Another growth priority for CEOs is to integrate ESG into their corporate strategy. China's transition to a low-carbon economy requires hard work and significant investment. Many companies, including KPMG, have committed substantial investment to carbon reduction and sustainable programs. In addition to the environment, we have also seen the social aspect attracting increasing attention. More and more business leaders believe corporate social responsibility is an integral part of their organization's purpose.

ESG is not only meaningful for society, it may also impact a company's bottom line. Over one-third of the Chinese CEOs in our survey said their ESG programs have improved their financial performance. However, close to half of the CEOs said that the linkage is not obvious and some even say the added cost of ESG programs may negatively impact their financial results. It is possible that ESG's impact on corporate results is often indirect, not readily measurable and therefore not yet obvious to some companies. Perhaps more work needs to be done by corporate leadership and business academia to establish the correlation more clearly. The trend toward greater ESG focus by companies, however, is undeniable and probably irreversible and I personally believe corporate leaders will do well to increase their investment and focus in this area.

Regarding supply chain risk, many business leaders tell us they anticipate that the pressure may not easily go away. The lingering pandemic impact, an uneven global recovery and international shipping constraints all factor into the consideration. To deal with the issue, they are taking a variety of actions. For example, many companies are monitoring their third or even fourth level of suppliers (that is, the supply from suppliers), in order to better anticipate potential issues. Some are diversifying sources of input by adding new procurement locations to render supply chains more resilient. Some companies are also using financial tools such as hedging instruments and long-term contracts to bring greater stability to input costs. There is no single solution that fits all organizations. Companies will need to carefully evaluate their own situation and use a strategic combination of measures to ensure an efficient and resilient supply chain.

In reflection, the pandemic has caused great disruption to the economy and to society. However, it has also given us an opportunity to pause and rethink our future direction. It is encouraging to see the rebounding confidence of senior business leaders. My hope is that CEOs will use that confidence to lead their organizations to a smarter, greener and more inclusive future.

The writer is chairman for KPMG Asia-Pacific and China.

The views don't necessarily reflect those of China Daily.