High inflation and slow economic growth have darkened the outlook for businesses. Big and small companies face higher costs and lower profits, and many are reviewing their expenditures to see where they can save. A recent survey found that investments for improved sustainability and reduced environmental impact are among the most likely to be cut first by companies feeling the pinch.

But reducing spending on environmental, social, and governance (ESG) initiatives — including climate change efforts — may cost businesses more in the long run. Here’s why:

1. You may miss out on opportunities and run into risks

In corporate and investor circles, ESG has transitioned from a fringe concern to a mainstream issue. As a result, there’s plenty of financing available for ESG initiatives — from building climate-resilient infrastructure to improving housing affordability. Companies that don’t keep up with ESG trends or invest in ESG awareness and training may miss out on these financing opportunities.

Even in a slowing economy, ESG investments may yield better returns than non-ESG alternatives. A Bloomberg analysis shows ESG funds have lost less than the broader market this year. Meanwhile, research from the BlackRock Investment Institute suggests ESG-friendly portfolios can outperform in economic downturns because the companies they include are typically well-run and have strong balance sheets. As a result, investors that skimp on ESG analysis may miss out on financially resilient equity and debt opportunities.

On the flipside, ESG risks — particularly climate risks — are occurring more often and inflicting greater financial impacts. In recent months, devastating heat waves, droughts, and other extreme weather events have assailed Europe, the US, and parts of Asia, crippling regional economies and increasing costs for businesses. In the wake of these calamities, companies and investors that don’t monitor or ignore ESG risks are more likely to see their earnings suffer and assets drop in value.

2. You may aggravate key stakeholders

Businesses of all shapes and sizes are under increasing pressure from stakeholders to embrace ESG. Public company shareholders have filed proposals at annual general meetings demanding that managers monitor ESG in their day-to-day operations and take steps to incorporate environmental and social priorities into their long-term strategies. Recent data shows investors filed 650 proposals to companies that are part of the S&P 500 as of July 29. That’s up from 613 in 2021 and 556 in 2020. All but 12 of the proposals filed this year focused on ESG issues.

Private companies and small and mid-sized enterprises (SMEs) aren’t immune from stakeholder pressure. Big businesses are encouraging non-listed companies in their value chains to share ESG data so that they can meet their own environmental and social goals. For example, Walmart is engaging thousands of suppliers to measure their greenhouse gas emissions and set reduction targets as part of its climate strategy, called “Project Gigaton.”

To meet stakeholder expectations, businesses need to maintain investment in their own internal ESG capabilities. If they fall short, the consequences could be dire. For example, private companies and SMEs may find themselves cut out of major corporations’ supply chains, while publicly traded companies could lose the backing of influential institutional investors. 

3. You may be unprepared for regulatory mandates

ESG and climate-related disclosure requirements are coming. From the US Securities and Exchange Commission to the International Sustainability Standards Board, financial reporting authorities have started transforming voluntary disclosure standards into mandatory requirements.

Companies that have poor ESG governance, data, and risk management capabilities will be ill-equipped to meet new reporting obligations. Failure to comply with regulatory requirements can result in costly sanctions, as well as reputational damages.

Companies without robust ESG functions will also be unable to turn regulatory requirements into business opportunities. ESG-focused investors will refer to company disclosures when constructing and rebalancing their portfolios. Firms will be more likely to attract these types of investors if they have high-quality disclosures and provide more data and context around their ESG risks and opportunities. Potential employees are also likely to use these reports to decide whether prospective employers share their values.

The bottom line 

ESG competence is a must-have for businesses today. Companies that don’t invest in ESG are likely to be blindsided by environmental and social risks and to fall short of regulatory expectations. Neglecting ESG is also a surefire way to alienate investors and deter potential employees.

Building ESG competence doesn’t need to be costly. There’s no need to contract legions of expensive consultants. Software-based solutions can offer high levels of expertise and flexibility at a fraction of the cost. 
Manifest Climate is the leading Climate Risk Planning solution. Our proprietary software and in-house climate experts help businesses identify climate risks and opportunities, build internal climate competency, stay on top of market developments and peer actions, and better align their disclosures with global reporting frameworks. Request a demo to learn more.