Why your business should prioritize ESG, even in the midst of a financial downturn

Why your business should prioritize ESG, even in the midst of a financial downturn

Already, the world’s biggest companies report nearly $1 trillion at risk from climate impacts expected to hit in the next few years, due largely to extreme weather events, rising temperatures, and costs associated with increased greenhouse gas (GHG) emissions.

This article originally appeared on Fastcompany.com

In a flashback to the 2008 financial crash, concern is mounting that as a global recession approaches, business leaders may slash their ESG budgets.

We’ve seen this scenario play out before. After barely a month into the war on Ukraine, we’d already witnessed grocery chains roll back pledges to eliminate palm oil and investment firms reverse sustainability policies. With history as our witness, it’s clear that sustainability is often the first item put on ice when companies grapple with decisions that might affect short-term financial returns.

Repeating this pattern risks propelling society backward at a time when we desperately need accelerated action. The business community must use the economic downturn as a vehicle to move society toward a new, resilient model in which living in balance with nature drives decision-making.

Playing the long game is what will truly safeguard business—protecting against future environmental crises with similar consequences to the global recession. Already, the world’s biggest companies report nearly $1 trillion at risk from climate impacts expected to hit in the next few years, due largely to extreme weather events, rising temperatures, and costs associated with increased greenhouse gas (GHG) emissions. And businesses are already paying today. In 2021, global economic losses from extreme flooding alone amounted to $82 billion.

Preparing for the not-so-distant future

While companies might survive the next quarter with ESG on the back burner, doing so will sabotage their futures, which aren’t so far away. Sustainability -disclosure mandates are ramping up in both the E.U. and the U.S. Combined with mounting consumer and investor pressures, more regulations are bound to force changes upon businesses.

The impending economic recession, like the crises before us, represents an opportunity for business leaders to double down on their sustainability commitments and come out stronger than their peers and better equipped to survive future disruptions.

To build resilience, businesses must mitigate the risks to physical and human capital across their global operations. This starts with identifying the level and nature of the climate risks facing the company and determining the best way to tackle them. For companies with significant physical risk associated with agricultural commodities, this may mean engaging with suppliers, cooperatives, and governments to stabilize yields and prices despite turbulent weather conditions. For those with risk tied to rapidly developing carbon-pricing mechanisms, this could mean setting aggressive climate strategies that reduce greenhouse gas emissions across their operations. And for companies that have risk associated with downstream markets that drive sales, this may mean developing business-transformation plans that capture emerging low-carbon markets.

Economic recessions, the COVID-19 pandemic, and the global supply chain crisis are all dress rehearsals for the disruptions ahead. As the window of opportunity to mitigate the environmental crisis closes, companies must re-evaluate the rules of business and lead their industries in radical yet necessary transformations to align with the limits of the planet.

Business leaders can accelerate progress toward this goal by driving change in untapped areas. One example is aligning internal sustainability goals with external support of public policy. There’s often a disconnect between the agenda of corporate sustainability teams and that of their colleagues in public affairs departments responsible for shaping a desired business environment. Business leaders must rectify this by establishing governance and oversight processes to ensure their external lobbying efforts and the trade groups they associate with support their sustainability commitments. And they’d be wise to do so swiftly—investors are already scrutinizing corporate lobbying activities and their alignment with the Paris Agreement.

Another way business leaders can drive change is by rethinking the very idea of demand, in everything from consumers’ technology choices and food to energy consumption and fashion. This isn’t a one-size-fits-all solution, and it will involve significant behavioral changes. But if businesses across all sectors took it on, the Intergovernmental Panel on Climate Change (IPCC) says global GHG emissions could be cut by 40% to 70% by 2050.

All these actions require a profound shift in mindset, recognizing that sustainable transformation is a long-term investment and businesses are engineered for shorter-term thinking. But bold action today will yield a future with advantages that far outweigh the benefits of business as usual in the present. Forward-looking companies recognize the need to decouple growth in revenue from environmental impacts to survive in a resource-constrained world.

Ultimately, leaders must assess their corporate footprint, pinpoint the activities that lead to a misalignment between their business model and the Earth’s ecosystem, and change their strategies accordingly.

Integrating sustainability into the crisis compass

When crisis strikes, companies must do more internally to ensure that sustainability never falls off the corporate agenda. Sustainability is business continuity. Without it, businesses risk losing their licenses to operate.

Lessons from the past show that those with a robust sustainability program fare better than their peers. Whether looking at stock price performance in response to COVID-19 or post-2008 financial crisis outcomes, evidence continues to illustrate that companies investing in ESG outperform those that deprioritize it. Why? Because companies pursuing sustainable transformation tend to be more innovative, competitive, and adaptable—all of which are fundamental to resilience. This notion isn’t lost on investors, who increasingly believe that sustainable companies are better positioned to weather-adverse conditions. And they have data to back this up: a Morningstar report revealed that 75% of its ESG-screened indexes outperformed their broad market equivalents in 2020; similar observations were made by other index providers.

When a crisis strikes, the ability to keep sustainability at the heart of the response is what will enable companies to emerge on the other side without long-term damage to the business, its reputation, and its stakeholder value. While a successful crisis response calls for small, agile teams, the legal and financial voices shouldn’t be the only ones guiding decision-making. Only by bringing in leaders with sustainability expertise can companies avoid making one-sided decisions that neglect the environmental agenda and build responses that enable long-term resilience.

By using moments of catastrophe as a catalyst to transform their business models, companies can contribute to securing a future for people and the planet. As the world buckles up for another financial downturn, it’s critical that businesses respond with an eye to what’s around the corner and refuse a return to business as usual as they recover.

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