As the world navigates the rough waters of an economic downturn, it can be easy for companies to let their environmental, social and governance (ESG) efforts take a backseat. However, this approach should not be considered lightly. With the U.S. Securities and Exchange Commission (SEC) expected to release final rules regarding ESG disclosures soon, proper planning and well-established frameworks will play a critical role in ensuring the long-term sustainability of a company and its reputation.

This is especially pertinent because of the SEC’s inclusion of Scope 3 within its proposed changes. Scope 3 extends the reach of ESG reporting beyond public companies and potentially holds suppliers and customers, both public and private, responsible for their impacts on the environment. Neglecting ESG efforts can therefore lead to increased operational and financial risks, and regulatory or legal vulnerabilities.

So, while scaling back on ESG during a recession may not present glaring red flags in the short term, it can unleash a domino effect of negative consequences. Instead, this time of economic uncertainty presents an opportunity for business leaders to strengthen their sustainability efforts and gain a competitive advantage, becoming better prepared for the future.

Hitting the Breaks on ESG Leads To Long-Term Consequences

While companies might be able to postpone their ESG initiatives to make it through the next quarter's financials, they would do so at the risk of undermining their long-term progress.

For instance, disregarding these measures during a recession can make a company vulnerable to compliance issues with existing regulations and may leave it unprepared for new standards when the economy recovers. The SEC’s proposed new set of rules on climate-related disclosures aim to provide better transparency for investors. It plans to release the final ruling by May. As more consumers and investors show interest in ESG transparency, more regulations are likely on the horizon, which could also affect both public and private companies.

These stakeholders also expect companies to take responsibility for their actions and be transparent about their environmental and social impacts. Companies that fail to meet these expectations may face reputational risks such as loss of trust, negative publicity and, ultimately, a decline in brand value and customer loyalty. A company's reputation is a crucial asset that can take years to build but can be easily damaged, and once lost, it can be difficult to regain.

In addition, the damages of pausing ESG efforts go beyond regulatory compliance and a company's reputation — it can lead to operational and financial hazards. A recent study revealed that 81% of respondents cited that their companies have experienced negative consequences by failing to meet their ESG goals. The most common consequences are increased operational risk (43%) and increased financial risk (38%).

Investing in ESG During a Recession Boosts Long-Term Benefits

As more and more companies embrace ESG principles, CFOs are discovering that they can be a powerful catalyst for driving profitability. A recent study revealed nearly half of CFOs plan to increase investment in ESG initiatives this year despite high inflation, ongoing supply chain challenges and the risk of recession.

From fostering innovation to strengthening risk management and customer relationships, ESG is a vital force in the business world. And the benefits of this approach reach far beyond simply polishing a company's reputation. ESG factors can have a tangible impact on an organization's financials and operations, helping companies to identify new opportunities while minimizing potential risks, leading to long-term financial gains. However, the effects of ESG go far beyond the bottom line.

Investing in ESG is not just about checking boxes for compliance or improving a company's image. It's about creating a sustainable future where companies and communities thrive, and the health and prosperity of the planet and its inhabitants are at the core of business decisions. By embracing ESG, companies can not only mitigate risks but also tap into new growth opportunities, attract top talent and earn the trust and loyalty of their stakeholders.

Savvy Ways to Tackle ESG During a Recession

Addressing ESG initiatives during a recession requires a thoughtful approach from C-Suite leaders, as it might require balancing competing priorities. Executives must consider economic and environmental factors when making strategic decisions, connecting the two to achieve lasting success.

The following are four tips on how companies can tackle ESG initiatives during a recession:

• Prioritize Initiatives That Align With Business Goals: Identify and focus on ESG initiatives that not only positively impact society and the environment but also align with the company's overall business strategy.
• Leverage Cost Savings: Implementing sustainable practices can often lead to cost savings, such as reducing energy consumption or waste. These savings can be used to fund additional ESG initiatives.
• Partner With Others: Collaborating with other companies or government organizations can help a company achieve its ESG goals more effectively and efficiently.
• Use Technology: Use automation to track and monitor environmental and social impacts and to find innovative ways to improve sustainability, efficiency and cost-effectiveness.

Next Steps

Meeting ESG goals during an economic downturn requires thoughtful, strategic planning. With due diligence, CFOs can help ensure their company is responsible and compliant with regulations and standards, setting them up for future success.

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