It is no surprise that corporates might consider pulling back on costs during financially stringent periods – but the questions of what projects get sidelined has never been more important.
Where previously sustainability activity may have been the first port of call for cuts, at a time where climate change awareness has never been more prevalent, we are encouraged to see that this is no longer the case.
In fact, as a consultancy advising corporates on their environmental, social and governance pathways on an international level, we are seeing the opposite: the business world is increasingly engaging with ESG.
Environmental concerns are pressing and with pressure from global governments to meet the targets set out in the Paris agreements, stakeholders expect businesses to act responsibly, mitigate negative impacts and meet carbon reduction targets.
Now business leaders are evaluating ESG risk in the same way they assess other risks.Most businesses are demonstrating awareness through some level of tangible action, and we are seeing a significant uplift in carbon projects as well as a commitment to reducing – with a view to eradicating – carbon from business operations.
Enquiries are also notably deriving from the top, indicative of C-suite interest in climate commitments and the route to practising good ESG.
The corporate landscape has been completely upended over the past two decades. The concept of ESG is nothing new – having previously been referred to as corporate social responsibility or ‘CSR’ – and historical market fluctuations highlight how little importance was once attached to it.
Illustrating this is the significant corporate momentum behind ESG following the pertinent documentary starring Al Gore, An Inconvenient Truth, which inspired a generation of business leaders to think about the realities of climate change for the first time, and the implications of failing to act.
Within a few weeks of the 2008 global financial crisis, this momentum was shorted, and CSR and sustainability teams were cut as businesses went into survival mode. Business’s prompt dismissal of ESG values in 2008 made it clear that the link between sustainability and longevity was still deemed a luxury.
Had more investment been made into renewables, more businesses could have been insulated from the energy crisis.Now, business leaders are evaluating ESG risk in the same way they assess other risks and are therefore realising that failure to act could have significant bearing on the longevity of their business.
The mandated Task Force on Climate-Related Financial Disclosures has partly facilitated this, helping to establish the new status quo: ESG is an integral part of how a business operates and is no longer seen as simply a ‘nice to have’. Now there is a clear pressure on businesses to act responsibly, it is no longer a luxury.
Is ESG costly for businesses?
When I started working in ESG more than 25 years ago, I never anticipated that costs would still have to be justified. Although beginning the ESG journey requires upfront investment from businesses, it is one that will pay back sooner rather than later.
On the contrary, ignoring ESG will impose bigger costs for a business in the long run, particularly with tighter regulation now in place, and consequently harsher sanctions for industry laggards.
Investor activity emphasises the true value in practising good ESG. Debates around whether ESG-labelled funds foster a strong return have been prevalent for some time, but research shows that ESG investments can outperform conventional ones.
Decision-makers now recognise the long-term value that a robust ESG strategy can generate.Over 10 years, the average annual return for a sustainable fund invested in large global companies has been 6.9 per cent a year, while a traditionally invested fund has made 6.3 per cent a year, according to Morningstar.
Current affairs also highlight the benefits of ESG proactiveness, particularly the potential to mitigate costs for businesses. For example, had more investment been made into renewables, more businesses could have been insulated from the economic shocks of the Russia/Ukraine war and subsequent energy crisis.
We cannot always predict market volatility, but we can implement measures to help absorb the more extreme consequences.
Is ESG another element of long-term planning for CEOs?
Data shows that ESG has become an integrated part of long-term business models, as the number of firms using an ESG measure in a long-term incentive plan increased from 15 per cent in 2021 to 32 per cent in the latest set of annual reports.
While this shows that decision-makers now recognise the long-term value that a robust ESG strategy can generate, it also speaks to their awareness of risk and how failing to act could have significant consequences for the longevity of their business.
Businesses must keep ESG goals in mind throughout decision making to avoid regressing on progress.Chief executives are also being remunerated, as three-fifths of the FTSE 100 executive bonus plans now have an ESG component.
What this also shows is how a strong commitment to ESG can help companies attract and retain top talent, by enhancing employee motivation through instilling a sense of purpose and boosting overall productivity. Employee satisfaction is positively correlated with an uplift in shareholder returns.
The current eco-political climate has made for particularly challenging times, but businesses must keep ESG goals in mind throughout decision making to avoid regressing on progress, which is now more vital than ever.
Optically it is comforting to see such a continued interest and prioritisation from significant corporates. And while we appreciate that sustainability will not always be the sole basis for how businesses act, it should at the very least remain at the forefront of decision making.
Nicola Stopps is chief executive and founder of Simply Sustainable
