Should ESG Programs be Recession Proof?

Should ESG be recession proof? Valid business reasons suggest not.

Over the past 20 years, programs that created corporate environmental, social, and governance (ESG) frameworks have been some of the hottest in the business world. No matter the industry, if a company has an environmental footprint, employs people, and adjusts to ever-changing government policies, then it has likely developed a model to help stakeholders understand how it plans to become greener, more socially conscious, and more transparent.

Current economic realities, however, are forcing executives to reassess all areas of their businesses and make tough choices, including reducing or even eliminating ESG initiatives.

The KPMG 2022 CEO Outlook shows that as recession fears loom, about half of the CEOs it surveyed “are pausing or reconsidering their existing or planned ESG efforts in the next six months,” while about a third “have already done so.”

But in a world where three letters have taken center stage alongside the COVID pandemic, racial and social inequity, and climate change, research from leading business authorities convincingly shows that continued support of ESG makes dollars and “sense” in three meaningful ways.

Three reasons why focusing on ESG during tough economic times makes good business and people sense
 

1. ESG drives cost savings and lowers capital costs
 

According to McKinsey, ESG is considered essential to ensuring corporate long-term financial success. It points to two key financial performance levers directly tied to ESG propositions:

  • Cost reductions resulting from sustainable business practices. Savings can include things like lower energy and water costs because of reduced use and lower packaging costs because of design improvements.
  • Investment opportunities from lower capital costs and higher credit ratings.

Per MSCI, companies with high ESG scores from rating agencies, on average, experienced lower costs of capital compared to companies with poor ESG scores in both developed and emerging markets during a four-year study period. The cost of equity and debt followed the same relationship.

The ability to raise capital is the thing that keeps executives awake at night. ESG-oriented investing has been on a meteoric rise over the past decade, with the 2020 Global Sustainable Investment Alliance Report estimating that $35.3 trillion is currently invested in short- or long-term impact projects. Tying projects to ESG goals opens capital and financing options. 

2. ESG impacts top-line growth and customer preference
 

Consumers are paying attention to the broader societal impact of the products they buy and the companies they do business with. This continues to be a key takeaway from the annual consumer and retailer sustainability report produced by First Insight and the Baker Retailing Center at the Wharton School of the University of Pennsylvania.

While the sustainability imperative is being driven primarily by Gen Z, the report’s summary shows that “consumers across all generations — from Baby Boomers to Gen Z — are now willing to spend more for sustainable products. Just two years ago, only 58% of consumers across all generations were willing to spend more for sustainable options. Today, nearly 90% of Gen X consumers said that they would be willing to spend an extra 10% or more for sustainable products, compared to just over 34% two years ago.”

The report goes on to show that “older generations — Millennials through Boomers — define sustainability primarily by the materials used to create a product. These include organic, naturally harvested fibers or products made from recycled materials. To Gen Z, sustainability includes sustainable manufacturing.”

3. ESG impacts a company’s ability to attract and retain talent
 

A risk of cutting ESG programming is losing your competitive hiring edge. ESG is routinely listed as a priority for top talent, as job applicants become increasingly interested in social and environmental issues and prefer to work for organizations that are making a positive contribution to society.

The 2022 Deloitte Gen-Z and Millennial Report highlights that “Gen-Zs and millennials are willing to turn down jobs and assignments that don’t align with their values.” Perhaps most interestingly, the report states that those who are satisfied with their employers’ societal and environmental impact are more likely to want to stay with them for more than five years. Continued focus on ESG can ultimately lead to higher retention rates and lower recruitment costs.

What does ESG look like in 2023?
 

The driving forces behind the movement for ESG have not changed. Climate change; supply chain management; diversity, equity, inclusion, and belonging; transparency; and a myriad of other issues will continue to pose challenges for companies in strong economies as well as in weak ones.

Continued dedication to the ESG movement in a year of economic volatility will come down to how strongly corporate values are tied to the pillars ESG represent. At UKG, Chief Executive Officer Chris Todd made this statement affirming our company’s commitment in the 2021 UKG Report: “ESG is core to the work we do every day and ties directly to our purpose: people. We know that our commitment to ESG will only enhance the culture we create for our U Krewers, the experience we create for our customers, and the support we provide to our communities around the world.” 
 

Read the white paper, What’s the Alternative? The Business Imperative of ESG, to learn why Environmental, Social, and Governance (ESG) is critical to understanding, communicating, and measuring your organization’s global impact.