A new McKinsey report highlights the urgent need for a new approach to corporate ESG.
It argues that the current model, which is heavily reliant on compliance and a proliferation of metrics, is leading to fatigue and is not effectively addressing major societal issues. The solution, as the report suggests, is for companies to transition to a more focused, capabilities-based strategy.
The McKinsey report, “Beyond ESG: From checklists to capabilities,” suggests that corporate ESG efforts are at a critical crossroads. The study argues for moving beyond a rigid, compliance-based approach to a more strategic, capabilities-focused model that aligns a company’s unique strengths with society’s most pressing challenges.
Key findings:
Proliferation and Fatigue: The median number of ESG-related KPIs monitored by a C-suite in large companies has increased 30% since 2018, now standing at 100. This rapid expansion has led to ESG fatigue and a decline in media mentions since 2024.
Widespread Impact: Companies create value for society through their core business functions, with an estimated $0.83 of every $1 of revenue going to employees, suppliers, and consumers.
The “Horses for Courses” Approach:The report advocates for a strategy where companies focus on a few societal issues where their specific capabilities can have the greatest impact. For example, a single company can’t solve all societal problems. Healthcare providers are uniquely positioned to address issues like maternal health and noncommunicable diseases.
Industry-Specific Opportunities: An analysis of 69 industries revealed that each is well-suited to address only a handful of the 18 societal issues studied. For example, the healthcare industry could account for 35% of the progress needed to improve maternal health.
High Costs, Long Horizons: Accelerating progress on the 18 issues would require an annual expenditure of $6 trillion, three times the total profits of Fortune Global 500 companies in 2024. The economic benefits often take decades to materialize.
Beyond compliance: a call for a new approach
While ESG has successfully moved into the corporate mainstream, its current compliance-based, checklist-driven format is proving to be inefficient and unsustainable.
The report points to geopolitical shifts and differing global regulatory environments—like the European Union’s move toward more reporting versus the US’s less stringent approach—as factors contributing to this fatigue.
The power of collaboration:
The report highlights that the most significant progress occurs when a company’s capabilities are aligned with favorable market conditions and government policies. Historical examples illustrate this point.
Zipline in Rwanda: The drone delivery company successfully partnered with the Rwandan government to create a medical delivery network, significantly reducing infant mortality rates by delivering blood to remote areas in just 15 minutes—a journey that previously took up to four hours.
Reliance Jio in India: The company’s launch of low-cost 4G services, combined with the government’s Digital India initiative, rapidly expanded internet access. This collaboration resulted in a 90% reduction in data prices for users, connecting hundreds of millions of people for the first time.
The report concludes that a capabilities-based approach requires a long-term view and collaboration with other businesses, nonprofits, and governments to address complex societal issues effectively. By focusing on what they do best, companies can create both business value and a lasting positive impact on the world.
