Embracing ESG in a Weakening Economy

October 26, 2022
By John Onoda
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Hands stopping dominoes from falling towards the Earth.

Businesses may well be preoccupied by the challenges of rising interest rates, inflation and a weakening economy in 2023 and beyond. Some companies will doubtless focus time and resources to develop and execute responses – reprioritizing business plans, reducing investments, cutting budgets, adjusting headcount and the like. As this happens, they may conjure a forced decision point: a choice between implementing ESG (Environmental, Social and Governance) initiatives or concentrating solely on the traditional business levers that immediately improve profit-and-loss statements. In our opinion, it would be unwise to deprioritize ESG until the next economic upturn.

The forces compelling adoption of ESG considerations in almost all aspects of business will not abate because of a weakening economy. The environment will continue to deteriorate, and the wealth gap will continue to expand. If anything, governance will become even more criticized as layoffs are likely to disproportionately impact minorities, low-income and historically marginalized segments of the population. While it sounds idealistic, we based our recommendation to continue the aggressive adoption of ESG considerations on disciplined pragmatism.

 

While it sounds idealistic, we based our recommendation to continue the aggressive adoption of ESG considerations on disciplined pragmatism.

 

Full scale, broad adoption of ESG into virtually every aspect of a corporation is now table stakes. It has put boards on notice that failure to reflect ESG can lead to shareholder activism. It has already altered traditional corporate functions and roles, and there is doubtless much more change to come.

Human resources executives now must think about wellness, mental health, DEI, remote work, gender designations, and tying compensation to ESG performance. Financial teams manage ESG reporting (and expected SEC regulations), human capital, and responsible investing and partnerships, while facing the specter of abandoning entire markets due to war and political pressures at a moment’s notice. Operations are being held more and more accountable for the policies and practices of suppliers. Communications teams are tracking employee and corporate activism, ensuring that executive messaging reflects the purported ESG-centric mission and vision, and striving for internal and external content consistency.

These changes aren’t just “nice to haves.” In many instances they form the backbone for meeting regulatory mandates, reporting requirements, and financial performance metrics.

Changes are also being driven by upheaval in workstyles. The pandemic has caused many workers to revise their expectations, reasons for loyalty, and trade-offs they are willing to make for long-commutes, stress, and compensation. Social issues unrelated to the business are now figuring in this calculation and thus into the corporate calculation of what it requires to attract and retain top talent. For example, some workers are wary of working in states with strict abortion laws while others assess whether potential employers will provide them with transportation out of such a state if the need arises.

All of this is happening in real time, against a backdrop of lightning-fast social media buzz cycles and hair-trigger responses to perceived missteps. Not only are corporate functions tracking ESG metrics and data related to reporting and regulatory frameworks, but they are also charged with reacting and pivoting when new issues crop up. The gap between the court of public opinion and what is legally required of corporations has diminished. Corporate functions must now be on alert to manage what they see on the Web and in the world that will inevitably shift from the communications/public policy/government affairs/sales & marketing arenas into concrete regulatory frameworks.

Across all functions, the traditional, legally driven reactive mindset is no longer adequate because regulatory enactment comes long after the forces of public concern are having a substantive impact on an enterprise. Reputational risk looms large and reputational damage can be swift and irreversible. We are all aware of many high-profile executives being forced out of their companies for behaviors that years ago would have evaded public scrutiny.

A strategic advantage can be gained by staying one step ahead of the societal trends. In so doing, a corporation can better navigate a minefield of risk, and bolster its status as ESG champion.

ESG has ushered in an era of change for corporate America. This dynamic new corporate climate demands a fresh mindset in all areas.  While economic challenges will be great over the coming year and will require a tremendous effort to manage, deprioritizing ESG will exacerbate many other problems today and tomorrow. The choice is not binary, this is an illusion. Those who cannot escape the old paradigms are the ones who perceive it as such.