In a recent podcast, our Vice Chair James Stewart discussed the uncertain times we find ourselves in. Formally in a recession. Unemployment rising. And still no sign of a Brexit deal. Given all that, can we really expect businesses to maintain their focus on the ESG (environmental, social and governance) agenda? Or is this the point where CEOs start to put profit before responsibility?
According to a recent pulse survey by KPMG, the answer is a (qualified) ‘no’, which I, for one, am relieved to hear. 78% of UK CEOs felt that managing climate-related risks will play a part in whether or not they keep their jobs over the next five years. And 60% say they want to lock in the sustainability and climate change gains made as a result of the pandemic.
It seems then, that at least the E of ESG will remain a priority for businesses over the medium- to long-term.
Is it really profit vs responsibility?
And while short-term cash flow will undoubtedly be a challenge for many, there is tangible evidence emerging to show that profit and responsibility don’t have to be mutually exclusive. Take a look at this article I read recently reporting analysis which showed that the returns on six out of ten sustainable funds were higher than on traditional ones over a ten-year period.
So is it really a question of doing good or making money? I’d argue that embedding ESG within the purpose of a business can be a positive driver of success.
The COVID experience highlighted that pretty starkly. Those businesses that had prioritised margin and short-termism at all costs over resilience and longevity had, in general, a tougher time. We all learnt the true meaning of ‘sustainability’ in this context and have come away with a clear imperative to find a means of properly valuing the resilience built into a business model.
And looking to growth, we know ESG aspects are increasingly important in retaining and winning customers. We all see people making buying choices based on a company’s approach to the environment or plastics. Or how they treat workers in their supply chain – look at recent events in the fashion industry. Yes, the pandemic has impacted the money in many people’s pockets and, yes, that will be a factor. But we’ve also all had a glimpse of what a world with less pollution and stronger local communities could be like, and many people like the look of it.
It’s also interesting that 92% of UK CEOs said the disruptive impact of the pandemic has forced them to rethink their global supply chain approach. And that wasn’t just about building resilience. One of the top two reasons given was pressure from customers and communities to bring production closer to home.
Perhaps then, what CEOs should really be asking is how they can find innovative ways to fund the investment needed now to be able to reap the ESG rewards in due course.
How can we keep the S in the spotlight?
74% of UK CEOs in our pulse survey said their response to the pandemic has resulted in a shift of focus towards the social component (the S) of their ESG programme. We all saw that in action during lockdown. Companies were communicating more openly with their employees. They showed understanding when staff needed to flex hours around caring for children or the vulnerable. And they got more involved than ever in volunteering and helping out local communities. We at KPMG felt that tangible difference ourselves.
But government support is easing off. And many companies are having to fundamentally reassess the very way they operate. That’s resulting in tough decisions around jobs. To survive, and to build resilient businesses, many will have to reorganise and consider making redundancies.
On the face of it, that doesn’t sit too comfortably with a commitment to the S of ESG. Will companies actually start to lose a lot of the goodwill generated during the pandemic? Certainly, businesses that made claims for government reliefs and are then seen paying out large exec bonuses should be ready for a public backlash.
But it was great to see a couple of weeks back a host of major business leaders tangibly backing footballer Marcus Rashford’s efforts to reduce child food poverty. It shows that CEOs can still have an eye on social responsibility even when there may seem to be more immediate issues.
My advice to CEOs on this? Take the decisions you need to survive as a business – clearly that’s non-negotiable. But do that in a sensitive and humane way, treating people fairly and with respect, and as you make your spending decisions don’t overlook the hidden costs of an unsustainable business model.
So, for time poor CEOs with existential decisions to be made, it can be tempting to put ESG on one side for the moment. But it’s not going away – not in the eyes of your investors, or your customers, or your teams.
And it’s worth reflecting that being a responsible business with strong ESG credentials provides the basis for a clear articulation of your corporate purpose. According to 86% of the UK CEOs in our survey, “Our purpose has helped us understand what we need to do to meet the needs of stakeholders: employees, communities, customers, partners and investors.”
So, growing evidence that the ESG agenda is not in conflict with survival or growth but something to embed into your business to deliver resilience to navigate the almost inevitable choppy waters to come, and sustainability for a longer-term successful future (and world!).