Sustainability takes a back seat as economic pressures mount for business

Businesses are contending with numerous challenges, from rising inflation to supply chain issues and soaring energy costs. While executives recognise the need to tackle the climate crisis – 90% of CEOs agree that climate change must be addressed urgently – sustainability budgets are coming under pressure as focus turns to these more immediate economic challenges.

A recent survey of chief executives by KPMG found that half of CEOs are contemplating pausing or reconsidering their ESG efforts because of economic pressures, with 34% already having done so. The most frequently cited factors impacting businesses ability to deliver on ESG strategy were the prevalence of other pressing business and economic matters.

Scott Wilson, UK head of ESG and sustainability at professional services firm Grant Thornton, says ongoing instability is making it harder to focus businesses on ESG. The company’s most recent Business Outlook Tracker report found that 33% of mid-market businesses have a net-zero carbon strategy – down from the 51% who reported working towards net zero last year.

“The current economic challenges and uncertainty are likely diverting businesses attention,” he adds. “It’s not that businesses don’t know sustainability is important, but they have had a huge amount of disruption and radical change to contend with over the last couple of years.”

Retailers row back on climate commitments

Software provider Supply Pilot is seeing a similar trend in the retail space. The company works with a number of high-street chains and supermarkets, including Marks and Spencer, John Lewis, Asda and Walmart.

Its CEO James Butcher claims that current economic concerns are “taking focus away from sustainability projects” and says that at least one retailer has admitted to postponing a number of its sustainability initiatives until at least next year. Another example is Iceland, which reversed its ban on using palm oil in its products due to the rising costs of alternative ingredients caused by the Russian invasion of Ukraine. 

“There is evidence that sustainability initiatives which might involve small, short-term costs to the price of products or packaging are being put on hold,” he adds. “Or at best, the bar for such initiatives is set a lot higher so as to avoid further product price inflation. Essentially, budgets have been reallocated.”

Simon Geale, executive vice-president of procurement at Proxima, is seeing similar impacts across the supply chain. In the consultancy’s most recent survey of 1,000 UK and US CEOs, a quarter claim to have had to delay their plans to decarbonise their supply chains or change their plans altogether, due to rising inflation. 

Geale says that there is a clear slowdown in the money being invested in this space, as CFOs look for places where they can reduce spending. “That makes some sustainability projects, which tend to have a short-term cost and a long-term payback, seem more discretionary than we would like them to be,” he adds.

However sustainability initiatives are not the only long-term projects at risk of having their budgets cut. “Ultimately there’s a slowdown on investments across most major project budgets, from digital to sustainability. That is a reflection of the market that we’re in, as businesses are finding it hard to cut costs to fund these projects,” Geale explains.

Looking at long-term risks 

The cuts to sustainability budgets reveal a worrying trend. The role of business is critical to reducing the impact of climate change and net zero cannot be achieved without the involvement of the private sector.

MSCI’s Net Zero Tracker reviews the progress publicly listed companies have made in cutting their carbon emissions. According to its research, listed businesses have 52 months before they deplete the emissions budget required to limit global warming to 1.5 degrees above pre-industrial levels, based on current trajectories. 

Ioannis Ioannou, associate professor of strategy and entrepreneurship at London Business School and sustainable business specialist, says: “These geopolitical and economic crises are very important, but that doesn’t mean that because we have one crisis, someone hit the pause button on climate change. 

“That’s the major challenge. We need a leadership that really focuses on the long term and works backwards from there because we are now at a critical juncture.”

He hopes that the impetus and crisis management skills learned by business leaders over the past few years can be applied to the climate crisis, acting as a “catalyst for more and faster change”.

In an analysis of business performance during the financial crisis of 2008, Ioannou and Boston University associate professor Caroline Flammer found that companies that continued to invest in R&D and CSR performed better than companies that looked to save money during the recession. 

Ioannou adds: “By saving, rather than investing, your way out of a recession, bsinesses are not going to be in the best position to adapt to the crisis itself. This reaction is normal, because a crisis creates uncertainty and will create liquidity constraints as the cost of capital becomes more expensive. But leaders have to think about competitive position at the end of the crisis.”

Thankfully, not all businesses are feeling the need to rescind their climate commitments. Gemma Baker, sustainability managing director at Accenture, says that she has not seen sustainability budgets being cut among her clients. Speaking at a roundtable hosted by SAP, she says: “The C-suite leaders that we’ve worked with understand that the only good growth is sustainable growth.”

It’s also important to remember that not every sustainable action has a high price tag attached to it. Geale says: “There’s lots of simple things that businesses can do in the short term and still make sustainability a design principle. In some cases, that will be simple things like managing consumption, changing specifications, looking at supply chains and reducing waste, which are all relatively low cost.”

Although longer-term risks can seem less pressing while in the midst of a crisis, carbon reduction, and the wider ESG agenda, remains a significant issue and can’t be forgotten.  Choosing not to prepare for the challenges of climate change will only leave businesses lurching from one crisis to the next.