Despite dire climate change warnings, ESG initiatives are on the chopping block at some companies despite the payoffs in employee retention, brand reputation and profits.
April 22 marks another annual Earth Day, but now more than ever, the planet needs swift action by corporations when it comes to sustainability, pollution and climate change.
Last month, the United Nations warned that the world is on the brink of catastrophic temperatures within the next 10 years, unless there is drastic economic transformation and a quick move away from fossil fuels. A few weeks later, the G-7—a group that includes Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States, as well as the European Union—pledged to speed the shift toward cleaner, renewable energy and phase out coal-fired power plants. “The volume on climate is being turned up, which is great, because we’re running out of time,” says Noa Gafni, executive director for the Rutgers Institute for Corporate Social Innovation and adjunct professor at Columbia University’s climate school.
Still, 59% of CEOs were pausing or reconsidering their existing or planned ESG efforts in the face of economic uncertainty, according to a January survey by KPMG. This, despite 70% of those same business leaders acknowledging that ESG programs improve their financial performance, reduce costs of capital, enhance employee and customer retention, and improve resilience of key assets. Some state attorneys general and treasurers publicly condemned socially and environmentally responsible investing, and last December, Florida divested $2 billion from BlackRock, the world’s largest asset manager over ESG policies. The Sierra Club has called the war on ESG the latest form of “climate denialism.”
“There’s definitely a political backlash against ESG, but it’s not going to go away because both consumers and customers are expecting companies to fill the gap with corporate social responsibility,” says Gafni. Consumer surveys show they trust companies more than they do the government, and there are greater expectations for corporate social and environmental responsibility.
Businesses that don’t engage in climate action face big risks, because already the effects of climate change are being felt with extreme weather across the globe, says Gafni. Sustainability, on the other hand, presents a big opportunity to cut costs and find opportunities for growth. “It can be done in a way that’s recession proof,” she says.
Investors, regulators push for action.
Pressure is mounting. Both investors and regulators across the globe are demanding companies measure and reduce their impact on climate change. New Zealand mandated climate-risk reporting; the UK, Singapore and India are not far behind. In the US, the Securities & Exchange Commission is set to require public companies to disclose their carbon-reduction targets and account for their carbon footprints.
This year, corporate shareholders filed 540 proposals as of mid-February, asking companies to address ESG, or environmental, social and corporate governance issues, according to Proxy Preview. About a quarter of those dealt with climate change, challenging companies to expose how they’re contributing to rising temperatures and how they’ll fix it.
Board directors aren’t uber confident about their sustainability performance so far, according to a survey by Boston Consulting Group and nonprofit international graduate business school INSEAD. At least 70% said their board was ineffective or only moderately effective at integrating ESG into strategy and governance. Board members surveyed largely believed they needed to devote more time to strategic reflection on ESG issues, and more than half said they were struggling with this.
Yet those board members could potentially face liability risks if they don’t make good on their climate change promises. Last spring, the environmental law charity, ClientEarth, sued 13 executive and non-executive directors of Shell, alleging they failed to properly prepare for the energy transition under UK company law. That begs the question: will directors of other companies also find themselves personally liable for their companies’ sustainability shortcomings?
Follow-through on sustainability pledges has long been challenging and greenwashing rampant. Corporations would often publicize climate-conscious moves without real action, underscoring a stark difference between what corporate boards say and what they actually do. Research by leadership firm Camunico and by Heidrick & Struggles found 72% of board directors said they were confident that their companies would reach their climate goals, but 43% hadn’t yet established any carbon-reduction targets.
Accounting for carbon emissions, of course, isn’t simple. Companies face data quality issues, inconsistencies of measurement and reporting, siloed platforms, and challenges with infrastructure. Some legal experts expect it will be tough for companies to accurately measure emissions and ensure responsibility in supplier contracts, and one analysis by The Washington Post found that the gap in underreported GHG emissions “ranges from at least 8.5 billion to as high as 13.3 billion tons a year.”
It’s especially difficult in industries like apparel, which may have 3,000 touchpoints in a supply chain that must be tracked and verified for not just emissions and sustainable materials and processes, but also to protect human rights. “But if you’re able to do that, the ripple effect is massive,” Gafni says.
Environment and sustainability pressures are here to stay.
There’s already a lot of work being done behind the scenes inside so many companies across the globe to make good on climate targets, says Eliza Erskine, founder of Green Buoy Consulting, which works with clients on carbon accounting, climate and ESG strategy.
Entire teams within companies are busy surveying and querying suppliers to understand their carbon footprints. Software companies, which may have a quarter of their carbon emissions from computer storage alone, are pushing cloud suppliers like Amazon, Microsoft and Google to use more renewable energy. HR officials, she says, are working to incentivize employees to reduce the impact of their commutes and business travel, and company leaders are reconfiguring manufacturing processes, packaging, logistics and shipping operations and scrutinizing sourcing for everything from product materials to office furniture.
“They’re like a duck on top of the water, where everything is great and then they’re paddling like mad underneath to ensure all those things happen,” Erskine says.
When it comes to real estate decisions, the environment and sustainability are increasingly top of mind. Citing government regulations and rising energy costs, 45% of executives surveyed said they would pay a premium to lease or buy a certified building, and a third would either seek a discount from or outright reject a building that lacked certification, according to a recent global survey released in March by commercial real estate investment firm CBRE.
As many as 84% sought energy-reducing features—and almost half would ask for a discount or walk away from a deal if a building lacked these. They’re also willing to pay a premium for spaces with on-site renewable energy generation (58%) or smart technology to monitor and adjust energy use (53%) to help reduce energy consumption and carbon emissions.
Erskine has seen that shift first hand with her own clients. “I would say, over half of my clients between this year and last year are either reevaluating office space in order to downsize or are reevaluating and trying to find LEED certified buildings,” she says.
The payoff goes beyond sustainability.
The companies that stay committed to sustainability will undoubtedly see a payoff that goes beyond the planet. A recent Deloitte study found that half of executives expected ESG reporting to increase employee retention, improve return on investment, and boost trust among stakeholders. Nearly half of respondents said they expected it would help their brand reputation and reduce risk.
Customers are no longer betting on the government to solve climate change and save the planet—they’re expecting corporations to handle it. A 2021 Gallup survey found that 84% of Americans said sustainability matters “a great deal” (50%) or “a fair amount” (34%). Companies are engaging their customers to boost sustainability: Taylor Stitch shows consumers how much water is saved through its manufacturing process, online thrift store ThredUp gives discounts to consumers who bundle shipments and help cut emissions, Home Depot started making it easier for people to schedule a haul off of old appliances and Patagonia is encouraging people to just buy less stuff.
Employees, too, put ESG at the top of their priorities when accepting or staying in a job. As many as 80% of employees surveyed this year by software firm Esker said ESG is either “extremely important” (48%) or “somewhat important” (32%). Women valued sustainability practices higher than men, with 84% of women calling them important compared to 75% of men.
John Friedman, managing director of ESG at accounting firm Grant Thornton, recently told Thomson Reuters that executives should just start reframing sustainability as simply “business.” It can be a powerful lever not only for repairing Mother Earth but for attracting more customers and investments, for engaging your workforce and driving profitability.
“No matter what you call it,” he says, “it is just smart business.”