Prioritizing Environmental, Social, and Governance (ESG) considerations, even in the face of economic downturns or inflationary pressures, is crucial for several reasons. While economic challenges may tempt some companies to shift towards less sustainable suppliers in an attempt to cut costs, doing so can have long-term negative consequences for both the company and society as a whole.
Some 90% of supply chains have been disrupted by inflation in the last year, according to a recent survey. Higher inflation and rising costs have hampered efforts to improve supply chain sustainability. As a result, more than half of organizations have been working with less expensive suppliers rather than greener ones to help cut down on rising costs.
The concept of ESG factors has gained significant traction in recent years, signifying a fundamental shift in how businesses view their role in society and the environment. ESG represents a set of criteria that companies integrate into their operations to evaluate their impact on the environment, society, and corporate governance. Since 2015, when 196 countries signed the Paris Agreement agreeing to set a goal of reducing global emissions by 2030 and net zero by mid-century, companies have been under increasing scrutiny and pressure to set their own ESG goals.
In 2020, 239 companies joined the Science Based Targets initiative to help the private sector set tangible ESG goals to help reduce the effects on the environment. A study from McKinsey & Company found that 94% of the companies committed to reductions in Scope 3 emissions, which includes their customers and vendors in their supply chains. Considering that Scope 3 emissions account for about 80% of an organization’s overall climate impact, that’s a big deal. It means that even in uncertain financial times, companies will be held to their ESG commitments or risk losing business.
While economic downturns often prompt organizations to prioritize financial stability, it is essential for companies to recognize the long-term benefits and strategic imperatives of prioritizing ESG even during challenging economic times. Read on to learn about some of the reasons companies switch to greener suppliers, as well as some reasons why that might not be such a good idea in the long run.
Understanding Why Some May Switch to Less Sustainable Suppliers
During an economic downturn, companies may face various challenges and pressures that can lead them to turn to less sustainable suppliers for several reasons. Some of the reasons companies might be tempted to turn to less sustainable suppliers include the following:
Cost Reductions. Economic downturns often result in decreased consumer demand and tighter profit margins. Companies facing financial difficulties during a downturn may prioritize short-term survival over long-term sustainability. To cut costs and maintain profitability, companies may opt for cheaper suppliers, even if they have less stringent sustainability practices. This can include sourcing materials or components from suppliers with lower environmental or labor standards.
Limited Supplier Options. Economic downturns can disrupt supply chains and lead to supplier shortages. In such situations, companies may have limited options for sourcing materials or products, making it necessary to work with less sustainable suppliers to meet production needs. Interestingly, Ivalua found that more than a third of organizations have turned to onshoring local suppliers as a remedy to economic uncertainty in the last year, and an additional 42% are planning to do so.
Pressure to Cut Prices. In a competitive market where consumers are looking for lower prices, companies may feel compelled to reduce product costs. This can lead them to work with suppliers who offer cheaper options, often at the expense of sustainability considerations.
Prioritizing Core Competencies. Companies may decide to focus on their core competencies, such as product development or marketing, during a downturn and delegate responsibility for sustainability to external parties or existing suppliers who may not prioritize sustainability as much. To maintain flexibility in uncertain economic conditions, companies may opt for shorter-term supplier contracts.
Long-Term Benefits of Prioritizing ESG During Economic Downturns
While it may be tempting to turn to suppliers who are less expensive even though they don’t prioritize sustainability, it's essential to recognize that these reasons are often driven by short-term financial considerations and can have long-term consequences for sustainability efforts and corporate responsibility.
At Bristlecone, we’ve already reached carbon neutrality in our operations, and in fact we were the first Mahindra company to do so. We’ve created a formal sustainability leadership team with a team leader that initiates efforts on creating a sustainable workplace, and we’ve planted some 1,000 trees to help out the environment. We’ve installed LED lights in our buildings, cutting the electric bills by 40%. More than 100 aerators installed on faucets cuts water usage, and reusable cups in the staff rooms as well as requiring password verification at all printers cut down on paper waste.
I’m not saying it’s easy, but companies that prioritize sustainability as a core value may need to navigate the challenges of an economic downtown creatively and make strategic decisions to balance their economic survival with their sustainability commitments. Consider the following:
Long-term financial and brand resilience. Prioritizing sustainability and ESG factors can enhance a company's resilience in the face of economic downturns. For example, a commitment to ESG can enhance a company's reputation and brand value. Consumers and investors are increasingly concerned about environmental and social issues. Companies that prioritize ESG build trust with stakeholders and can benefit from stronger brand loyalty and customer support. Conversely, those seen as neglecting sustainability may face reputational damage that can be difficult to repair.
Access to capital is already tight amid a competitive financial landscape. Investors are increasingly incorporating ESG criteria into their investment decisions, so those companies that prioritize sustainability can access a broader pool of investors and capital sources. In contrast, those neglecting ESG may find it more challenging to attract investment or secure favorable lending terms, especially as ESG factors become mainstream in financial markets.
Regulatory compliance and risk mitigation. ESG regulations and reporting requirements are becoming more stringent in many regions. Ignoring ESG considerations can lead to non-compliance issues and legal risks. Companies that prioritize ESG are better prepared to meet evolving regulatory standards and avoid potential penalties or legal disputes. Also, ESG considerations help identify and mitigate risks that might not be immediately apparent. Issues like climate change, social unrest, and ethical violations can have significant financial and operational implications.
Innovation and competitiveness. Sustainability can drive innovation and improve a company's competitiveness. Rethinking supply chains, product design, and business operations to reduce environmental impact often leads to creative solutions and cost savings. It can also position companies as leaders in their industries, attracting customers and partners looking for sustainable solutions. We’ve launched two solutions on SAP offering sustainable strategy, a sustainable sourcing assessment framework, an industry 4.0 roadmap, network optimization, and an ESG risk assessment as part of our consulting offerings to help our fellow companies reach their goals.
In addition, a strong commitment to ESG can attract top talent and improve employee retention. Many employees seek purpose-driven work and are more likely to stay with companies that align with their values. At Bristlecone, we include our employees in our ESG efforts; in FY23 we conducted a Rise in Sustainability webinar with 335 employees in attendance to help raise awareness of the company’s sustainability efforts. A sustainable and socially responsible corporate culture can help companies attract and retain skilled employees.
ESG Helps Companies Put Purpose Before Profit
In conclusion, companies should prioritize ESG even in economic downturns for several compelling reasons. ESG promotes long-term sustainability, enhances risk management, fosters stakeholder trust and reputation, and provides access to capital and investment opportunities. While the pressures of a downturn may tempt some businesses to sideline ESG considerations, doing so can ultimately undermine their resilience and competitiveness. By recognizing ESG as a strategic imperative, companies can not only weather economic storms but also contribute to a more sustainable and responsible global economy. Prioritizing ESG is not merely a business choice; it is a responsible path forward that aligns profit with purpose.
