Sustainability has been sitting high on the corporate agenda these past couple of years — and with good reason. Pressure to act on the climate crisis, for example, is mounting. Sentiment at COP27 was pessimistic, with global political leaders once more stressing urgency and alluding to the catastrophes due to occur if nothing is done. According to UN Secretary General António Guterres, the world is on the “highway to climate hell” and, even worse — with “our foot on the accelerator”.1 Companies worldwide have been increasingly busy reflecting on how they can adopt a more conscientious approach to doing business.
However, with 2022 being dubbed the year of ‘permacrisis’, businesses may find that sustainability is competing for bandwidth with other executive priorities, particularly with economic headwinds getting stronger. Turbulent months have become the norm, with pandemic restrictions being replaced by geopolitical instability, rising inflation, muted economic output, and increasing political and economic uncertainty. The temptation is for the sustainability agenda to be pushed aside.
In this Executive Insights, we provide guidance on why now is the time to focus on sustainability, including:
- The importance of continuing sustainability agendas and avoiding postponing progress during the economic downturn
- What economic benefits sustainability can bring in this economic cycle and beyond
- Steps to ensure a pragmatic approach to the inevitable trade-offs in the context of uncertainty
Resist the urge to kick the sustainability can down the road…the time to act is narrowing
The window to act on climate change is closing. The UN called this past year a ‘wasted’ one in its October release of the Emissions Gap report, where small, incremental changes implemented in the past year have had insufficient impact.2
A spate of new regulations will make it much tougher to kick the proverbial ‘ESG can’ down the road. European firms, for example, face more stringent measures under the Corporate Sustainability Reporting Directive, with its extended scope now covering all large or listed companies.3 The UK, meanwhile, has this fiscal year become the first G20 country to mandate that its largest businesses disclose climate-related risks and opportunities.4 Consequently, corporates are increasingly being compelled to report the actions they are taking regarding sustainability. This is no longer a ‘nice to have’ — it is a ‘must have’.
There are also potential benefits to being a sustainability leader. Attracting talent, driving top-line growth (e.g., through share gain, product opportunities), saving costs and greater access to financing are all benefits associated with a strong sustainability position. However, given the competing priorities with economic headwinds and several fundamental challenges to tackle, many companies may be questioning whether now is the best time to act on sustainability.
Doubling down on sustainability to ride out the economic downturn and improve long-term health
Despite these challenges, we have outlined five areas where prioritising sustainability will not only help businesses ride out the downturn, but also position them to thrive in the post-recession rebound. Importantly, acting now can help to set up for long-term success.
Managing — and exceeding — stakeholder expectations
Expectations across multiple stakeholder groups have shifted, putting pressure on companies to respond.
More than ever, customer expectations are shifting towards sustainability and, consequently, placing pressure on businesses to adapt. Having environmental, social and governance (ESG) programs in place was found most likely to influence brand loyalty in 65% of millennials and 49% of baby boomers.5 Business-to-business (B2B) firms are also feeling the pressure from their own customers seeking to progress their own sustainability agenda. With 68% of listed corporates in continental Europe and the UK tying executive incentive plans to at least one ESG metric,6 it is clear that shareholders value accountability on sustainability issues.
Suppliers, too, are feeling the brunt of the sustainability agenda. With Scope 3 emissions targets gaining scrutiny,7 supplier engagement is becoming increasingly common as companies try to reduce carbon emissions across their entire value chain. Within pharmaceuticals, for example, GSK launched its Sustainable Procurement Programme in September of this year, pushing its suppliers to disclose emissions and set carbon reduction targets.8 Jaguar Land Rover, meanwhile, invited its entire global tier 1 supplier network to commit to Science Based Targets initiative (SBTi)-approved targets to reduce greenhouse emissions by 2030. The stringency of mounting regulatory pressures is driving companies to get moving.
Attracting and retaining talent against the backdrop of ‘quiet quitting’ and the ‘Great Resignation’
The challenge for firms to attract and retain the best talent remains greater than ever, as the pandemic by-products of the ‘Great Resignation’ and ‘quiet quitting’ remain prevalent.9 In fact, many firms have cited lower engagement and decreased productivity following the return to the workplace.10 Some industries have struggled to recover from the pandemic as they have simply been unable to rebuild their workforces fast enough. In the travel and tourism sector, for example, over 200,000 jobs across the UK are still expected to remain vacant by the end of the year.11
Heightened prioritisation of sustainability can help with talent acquisition, engagement and retention. Today’s jobseekers value sustainability: In a recent study, nearly 40% of millennials stated they had accepted one job offer over another because the company was more environmentally sustainable.12 Over the longer term, this trend holds great significance to firms, particularly in enabling companies to recover effectively following a downturn. With millennials and Generation Z forecast to comprise 72% of the world’s workforce by 2029,13 there is an increasing necessity to align to their value sets.
Top-line opportunities and future-proofing
When the macroeconomic environment is uncertain, protecting and building long-term top-line growth is critical. Sustainability can underpin top-line revenues through several levers — new products and services, price premiums (in some instances), and market share (defensive and offensive). In L.E.K. Consulting’s Global Corporate Sustainability Survey this year, 66% of surveyed businesses viewed sustainability as a major commercial and growth opportunity.14
To start with, ESG-linked product and process innovation can drive brand advantage and competitive differentiation, boosting top-line sales. Large companies which have focused on sustainability in the past three years, for example, have been growing sales at twice the rate of those not committed to sustainability.15
In some sectors and product niches, sustainability can also help drive top-line growth by targeting customers’ willingness to pay and capturing a ‘green premium’. In the US, 75% of millennials indicated being willing to pay more for sustainable products16 — though this is not always translated into action. In most cases, however, strong sustainability credentials can at least help defend price position and justify passing on inflationary cost pressures, which is especially key in the current economic situation.
Further down the supply chain, investing in sustainability can help companies solidify their position as a supplier of choice. Large original equipment manufacturers (OEMs) are increasingly auditing their supply chain to ensure compliant ESG practices throughout, with the Carbon Disclosure Project recording a 24% increase globally from 2019 to 2020 in large-scale purchasers asking suppliers to disclose environmental data.17 As a result, suppliers will increasingly need to implement and evidence sound sustainability measures. Doing so can help position them as primary suppliers, hopefully boosting sales, but at a minimum preventing share erosion.
Fundamentally, to protect long-term top-line growth, companies delaying sustainability run the risk of losing sales and customers to those that do place sustainability at the heart of their strategy. Opportunistic firms may even stand to benefit from the ESG shortcomings of rivals and take market share.
“Firms run the risk of losing their sales and customers to those that place sustainability at the heart of their strategy.”
Securing cash flow by managing — and optimising — costs
Robust cash flow and careful management of operating costs have always been critical to a business’s financial health. The current economic reality has only shone an even brighter spotlight on this.
Improving energy efficiency is one lever, for example, by which ESG initiatives can help reduce operating costs — and there are short-term wins available. Walmart, for example, is on track to save $100 million annually simply by centralising how it maintains the equipment in its stores to be more energy efficient.18
Other ESG cost-cutting initiatives might include reducing material waste and associated costs, and/or decreasing packaging and material inputs. As one example, PepsiCo saved over $20 million a year on utilities and other expenses by treating and recycling water from its production process.19 Furthermore, Dell has managed to cut its packaging bill by more than $18 million using new packaging materials (e.g., biodegradable mushroom solutions), with 20 million pounds of weight cut from its supply chain.20
While investing in sustainability can require upfront capex, this may be outweighed by offsets from opex. Companies are encouraged to consider trade-offs holistically in light of potential achievable savings.
Standing out to investors in a time of need
Firms may need to rely more on external public and private funding to weather the storm. Increasingly, access to funding (both debt and equity) can be enhanced for companies with strong ESG credentials — and conversely, be constrained for companies with weak ESG credentials.
Eighty-seven percent of businesses now say they feel pressure from investors for increased ESG reporting.21 2021 saw green, social and sustainability bonds reach a new global record of over $700 billion in issuances, almost double the 2019 total.22 Moreover, global ratings agencies now incorporate ESG metrics when underwriting credit ratings.23
When it comes to government support, the ‘green’ agenda is very much top of mind. The UK, for instance, has earmarked nearly £5 billion of funding to help and encourage domestic businesses to become greener.24 Meanwhile, on the continent, the EU’s Innovation Fund will provide funding of up to €10 billion until 2023 for green projects which contribute to greenhouse gas reduction.25 Government help is not restricted to funding, but also includes tax breaks and tax-eligible deductions. In the UK, the Climate Change Agreements enable companies in energy-intensive industries to benefit from a reduction of up to 92% on the Climate Change Levy tax.26
With all this emphasis on green funding and investments, financial regulators have unsurprisingly commenced a crackdown on ‘greenwashing’. Forty-four percent of investors cite investments not being what they claim as their biggest worry when it comes to ESG investing.27 In light of this, the Securities and Exchange Commission (SEC) in the US, for one, has proposed strict climate disclosure requirements, for example mandating that funds with names including ‘green’ or ‘sustainable’ must disclose how their investments satisfy such descriptions.28 The UK’s Financial Conduct Authority made a similar move in October 2022.29 It goes without saying that, more than ever, firms need to show real, credible commitment to sustainability. They can no longer get away with hiding behind marketing campaigns.
“More than ever, firms need to show real, credible commitment to sustainability. They can no longer get away with hiding behind marketing campaigns.”
The prioritisation of sustainability activities requires a clear and pragmatic approach
With a multitude of possible ESG initiatives, companies may not know where or how to begin. Additionally, because many companies lack sustainability domain experience, it is hard to gauge which initiatives may yield high returns despite significant upfront costs, and which may not be worth pursuing.
It is worth noting that companies which have sought to do the ‘right’ thing from an environmental standpoint (i.e., prioritise environmental impact despite upfront costs) have often been rewarded financially in the long term. For example, companies which switched to renewable energy a few years ago are at a cost benefit today as gas prices skyrocket and the cost of renewables falls faster than expected. On the other hand, companies which delayed such initiatives have lost out — like UPS, which waited to move to an electric fleet.30
To move from high-level, sweeping sustainability commitments to actionable progress with tangible effects, companies can adopt simple prioritisation criteria which consider key benefits and trade-offs.