CEOs Are Starting to Hit the Brakes on ESG

CEOs say they still believe in the importance of environmental, social, and corporate governance (ESG) programs, but they’re willing to put them on the back burner for a while because of economic pressures, according to a new study from KPMG. The “KPMG CEO Outlook,” which came out this month, is based on interviews with 1,325 global CEOs.

The study found that, as economic uncertainty continues, 50 percent of participants are pausing or reconsidering their existing or planned ESG efforts over the next six months, and 34 percent already have done so. This pause represents the first major loss of momentum for ESG programs since they began sweeping through large companies like a tornado in recent years.

In the 23-page report, KPMG cautions that companies could pay a steep price for hitting the brakes on ESG efforts, even if only temporarily. The report notes that any pullback would be occurring at a time when stakeholders are ratcheting up their ESG expectations. The study found that 69 percent of CEOs see stakeholder demand for increasing ESG reporting and transparency, and that 72 percent believe stakeholder scrutiny of ESG will continue to accelerate.

“ESG has become an intrinsic business imperative,” the study’s authors note. “Delaying key ESG efforts could make businesses more reactive in the future, rather than help them lead the way with greater transparency, resilience, and sustainability.”

Indeed, study participants acknowledged that their companies might pay a steep price for being viewed as an ESG laggard. The biggest risk, cited by 25 percent of respondents, was higher financing costs or an inability to raise financing. Other major concerns included difficulty recruiting employees (22%), competitors gaining an edge (21%), the potential for the CEO to lose his or her job (17%), disengaged employees (10%), and loss of customers (5%).

Many companies are nonetheless willing to temporarily pull back from ESG because they see economic storm clouds forming. According to the study, 86 percent of CEOs believe a recession will happen over the next 12 months, though 56 percent believe it will be mild and short. Seventy-six percent said they already have plans in place to deal with it.

These CEOs are not walking away from ESG entirely. Sixty-two percent said they will be looking to invest at least 6 percent of revenue in programs that enable their companies to become more sustainable.

But some ESG advocates believe that any step back from recent ramped-up efforts carries risks. In a client note responding to the KPMG study, Jamie Cameron, who practices employment law in the United Kingdom for Burges Salmon, called sacrificing ESG momentum to help weather tough economic times shortsighted.

“With the fears of a recession, it can be tempting to focus on the short term, but there are real long-term opportunities for businesses to capitalize on by aligning their ESG strategy with their business needs,” he wrote. “In fact, it may actually be time to double down on ESG commitments, and those organizations who maintain a consistent and authentic approach will be well placed to develop significant competitive advantage when we come out of the other side of the downturn in the market.”

From: Corporate Counsel