March 2, 2023
Authors
Key Points
- Crisis and uncertainty often prompt greater investment in sustainability, as companies realize the need to better understand and act on environmental and social dynamics.
- The tailwinds for action on sustainability are stronger than ever, even if future developments remain uncertain.
- There are several actions companies can take to effectively navigate the current crosswinds.
People have worried about the end of environmental, social, and corporate governance (ESG) since before it was called “ESG.” For decades now, reports of the death of ESG have been greatly exaggerated, and these concerns have continually accompanied global crises.
In 2007-2009, the Great Recession and banking crisis rattled the burgeoning field of environmental, social, and governance action. Then, in 2016, Donald Trump assumed the US presidency and withdrew the US from the Paris Agreement. In 2020, COVID-19 struck, bringing astonishing global disruption and damage. Two years later, Russia invaded Ukraine, plunging Europe into energy, human migration, and cost-of-living crises. In each case, pundits speculated: would investors and businesses drop this ESG stuff amid the terror and economic calamity of the moment?
In each case, the opposite happened: crisis led to greater awareness and more rapid action on the social and environmental challenges that affect business. To take a current example, analysis indicates that the war in Europe has "turbocharged the green transition.” Credible, strategic approaches to sustainability built on engagement with stakeholders, management of ESG risk, and contribution to the global sustainability agenda aren’t a distraction—they are a compass.
Seven Themes Shaping Sustainable Business
The tailwinds for action are stronger than ever, even if businesses face increasing uncertainty. We’ve identified seven themes to consider, beginning with issues that companies can anticipate with confidence and moving down to more volatile topics:
- Stakeholder advocacy is growing, with higher expectations of companies by consumers, employees, and civil society, all with a keen eye for greenwashing and passivity. Demographic and generational shifts are inspiring a wave of even more vigorous and effective advocacy.
- Global regulations are mandating action and disclosure. Those directives cover public and private companies alike as well as a range of sustainability issues, including climate, human rights, social impact, and board oversight.
- The financial industry is integrating and committing on ESG, driven by recognition of the value of ESG and strengthened by emerging regulatory requirements. The increase in action spans the industry, manifesting in everything from ESG asset management to mergers and acquisitions (M&A) diligence, insurance premiums, and lending terms.
- Economic drivers are strong, but may face tailwinds. For example, there is dramatic growth in government investment in green energy, and clean energy costs are coming down. While significant economic uncertainty and headwinds could stymie investment in sustainability. they could just as easily put more of a focus on “S” issues such as jobs, cost of living, social benefits, community impacts, and consumer trust.
- Regional and sub-regional action is fragmented and escalating. In the US, some state politicians seek political points by criticizing ESG, even as other states are pushing ambitious sustainability agendas. The EU’s far-reaching reporting requirements under the Corporate Sustainability Reporting Directive (CSRD) and Corporate Sustainability Due Diligence Directive (CSDDD) potentially set up misalignment with US requirements. While the trend is toward more global support for action on sustainability, there is considerable fragmentation and uncertainty by geography.
- US national politics and court decisions are highly unpredictable. Some political figures are pushing a highly politicized view of ESG and often demonizing business in the process. This rhetoric threatens to create a chilling effect on the ability of companies to exercise judgment in addressing material business risks and opportunities, even as the American people seem to agree on seeking corporate accountability and action. Similarly, US courts have recently issued dramatic rulings with implications for companies and their stakeholders.
- Geopolitics are pivoting on climate and sustainability: Whether it’s climate change, human rights in supply chain issues, or technology, privacy, and expression—sustainability topics are now a major force in geopolitics and business. There is high potential for volatility and disruption.
Companies Can Take Several Measures to Navigate the Current Crosswinds
- Focus on material risks and opportunities, not jargon
- Understand how salient and material issues impact long-term business value
- Be specific on risks and opportunities affecting enterprise value, people, and the environment.
- Strike out “jargon” in favor of using direct language and debunking myths
- Build relationships to deliver long-term impact and value
- Engage your stakeholders to understand how they are affected, understand their expectations, substantively address your impacts, and be prepared to show your positive effects (e.g., community impacts, economic growth, health equity)
- Work directly with investors to show effective ESG risk management and potential for increase in value
- Seek ESG-linked financing opportunities and the potential for increase in value
- Be transparent, build integrity, anticipate global requirements
- Anticipate global disclosure expectations, laws, and common global frameworks. Don’t “wait and see”—be bold and open about the challenges of implementation
- Align globally to avoid inconsistencies across regions
- Be transparent behind all claims, including addressing positive and negative impacts
- Drive purposeful leadership in policy and business
- Foster public leadership (e.g., communications, collaborations) and private diplomacy (e.g., engagement with policymakers) to support an operating context that enables sustainable business growth and builds trust for and in business
- Consider ESG regulations/attitudes as part of market and geopolitical risk analysis
- Align policy and sustainability priorities (e.g., in political spending/donations, policy agendas) and disclose activities
- Get comfortable with uncertainty
- Use futures analysis to identify potential risks/opportunities and potential steps for resilience, including trends assessment, scenario analysis, and visionary futures
- Identify and prepare to respond to emerging risk events (e.g., major court decisions)
- Build board and executive support
- Engage the board to increase understanding of ESG and its direct business relevance
- Encourage board strategic planning, emerging risks, and stakeholder insight on ESG
- Ensure board oversight of ESG and ESG disclosure that is consistent with global regulations
There is a storm for sustainability. But with a good compass and an eye on the long-term horizon, companies can navigate toward the just, sustainable, and thriving economy we all need.
For more on this topic, BSR members can review our recent webinar featuring additional investor insights from Morgan Stanley and stakeholder analysis from Polecat: Into the Sustainability Maelstrom: Navigating Uncertainty in 2023.
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