ESG in a downturn

In the past few years, business leaders have faced a series of rapid-fire challenges—the pandemic, the Russia-Ukraine war, disrupted supply chains, talent shortages, and soaring inflation. At the same time, many companies have expanded their commitments to environmental, social, and governance (ESG) goals by working to reduce their carbon footprints, improving diversity in hiring, and other initiatives.

Now facing the prospect of a slowing global economy, some executives consider ESG an easy cost-cutting target. In KPMG’s 2022 CEO Outlook survey, 59 percent of U.S. CEOs indicated they would consider reducing or pausing ESG programs to lower expenses in a downturn.

While it is understandable that CEOs are looking for ways to preserve profits in 2023, we believe this is the wrong moment to lessen ESG efforts. Companies could face a loss of momentum on ESG initiatives, such as progress toward net zero, be less prepared to meet the new Securities and Exchange Commission (SEC) carbon reporting requirements, disrupt supply chain relationships, and receive lower ESG scores.

There could also be vital lost opportunities. The Inflation Reduction Act (IRA), for example, provides many extra incentives for investments in renewable energy. The combination of the IRA and the new SEC reporting requirements have already encouraged many companies to accelerate their decarbonization processes, realize more energy savings, implement subsidized clean energy projects, and create innovative supply chain solutions.

This paper looks at the risks of cutting back on ESG now, the benefits gained by maintaining ESG efforts, and ways companies can trim or postpone ESG costs.