Why ESG Still Matters During Economic Downturns

The global economic turndown is top-of-mind for business leaders. In the U.S., 59 percent of CEOs anticipate needing to pause or scale back their environmental, social and governance (ESG) efforts as a result, according to a recent survey by KPMG.

However, walking away from ESG right now could be disastrous for business, argues Geetanjli Dhanjal, senior director of business transformation for the consulting firm Yantra.

Scaling back environmental commitments would not only be detrimental to the planet, but it could also hurt the bottom line. “Companies should be committed to ESG and diversity, equity and inclusion (DEI) now more than ever,” Dhanjal told TriplePundit. Pausing these programs to bolster the budget could backfire by eroding consumer perceptions and damaging trust among employees, she warned. 

Case in point: The retail sector proves ESG still matters 

While certain sectors are more vulnerable to recession than others, retail is one of the highest-risk industries during economic downturns. Still, Dhanjal noted that many of her clients in retail, fashion and apparel are not turning away from ESG to save money. Rather, they are doubling down on their initiatives, from sourcing sustainable materials to ensuring fair pay for workers in their supply chains.

“These clients know that when in an economic downturn, one doesn't just stop investing in ESG," Dhanjal said. "ESG is a long-term strategy and roadmap. During economic downturns, businesses can invest in low-cost sustainability initiatives in order to maintain brand value and give back to the community.”

Further, many sustainability programs come with a cost savings. “When we enable green shipping methods, we reduce our costs, reduce our carbon footprint, and the customer benefits by paying less for shipping," Dhanjal noted as an example. 

Investor trust is in jeopardy: Stronger ESG programs and reporting can help 

While robust ESG programs can help grow consumer affinity and employee engagement, businesses now face a new problem: waning investor trust.

In KPMG's survey, 3 out of 4 institutional investors said they do not trust companies to meet their ESG and DEI commitments. Dhanjal believes their concerns are valid: Indeed, many companies are not meeting their commitments. But the trust gap also presents investment and growth opportunities for companies that are serious about implementing ESG, she said.

“There are many reasons for distrust," Dhanjal told us. "There are no consistent reporting frameworks. Enterprises may have more standardized reporting methods than small businesses, but they need to report transparently with the proof that they’re doing what they’re saying.”

Businesses and international agencies have also recognized the need for companies to demonstrate proof of their progress through standardized frameworks for sustainability reporting. At the COP26 climate talks in 2021, the United Nations and participating governments established the International Sustainability Standards Board (ISSB) in order to create a standard, global framework. 

An evolving regulatory landscape calls for more ESG investment, not less

Dhanjal sees more changes on the horizon for corporate ESG programs. Regulatory changes will make compliance more challenging for companies that do not proactively measure, monitor and report on their sustainability efforts. Time is critical.

“Companies must invest in the tools they can use and the systems to provide them with the data they need to create their long-term strategy," Dhanjal said. "Companies also need the right consultants and partners to guide their programs and initiatives. Your specific company doesn’t need to be experts in ESG, but you can invest in the consultants and tools to guide you.” 

Investment in tools to measure sustainability data is increasingly critical for companies that hope to to stay ahead of ESG regulations. The United States and European Union are moving toward making sustainability reporting mandatory for large businesses. That includes climate risk reporting in the near term, with mandatory disclosure of nature-related risk not far off. 

The U.S. Securities and Exchange Commission (SEC) in particular is expected to release its long-awaited climate reporting rules this fall. But many businesses are not waiting for the final verdict. In fact, 70 percent of business leaders said they've already begun to disclose their climate-related data in alignment with expected changes from the SEC, according to 2023 polling from PwC and Workiva. Still, 85 percent of those respondents worry their teams don't have the right technology to accurately track and report their sustainability data.

Keeping up with the times requires consistent investment, and pulling back could mean falling behind. "It is not easy to implement systems, transform supply chains and invest in proper tools," Dhanjal said. "Things are changing rapidly while everyone is learning about sustainability at the same time, and that can be a challenge. Making sure we have appropriate tools and clear guidelines is a major challenge for ESG, but this is also our work [as ESG professionals]: to educate.”

Image credit: Miltiadis Fragkidis/Unsplash