ESG and corporate purpose have risen to the top of the agenda for many chief executives (CEOs) as result of growing pressure from investors, regulators and their own staff. According to a recent KPMG survey of 1,325 global CEOs across 11 markets, 45 percent of CEOs agree ESG programs improve financial performance and is integral to their company’s long-term success - up from 37 percent a year ago. However, in the face of sky-high inflation and soaring interest rates, some are having to decide whether their priority will be next quarter’s results or a low-carbon, sustainable economy. The survey reveals 50 percent are pausing or reconsidering their existing or planned ESG efforts and 34 percent have already done so. They see ESG-related spending - such as, a capital expense to reduce energy use, opting for renewable energy, paying living wages, and so on - as purely cost, not investment.
Motivations for capital spendings are typically profit-seeking, where it may acquire businesses or open new stores in aim to grow their revenue line; or it may be for maintenance purposes such as maintaining or replacing equipment. But capital spending can also be employed to reduce cost, and ESG spending falls into this category. For example, the cost of installing solar panels can reduce future energy costs as well as emissions. Another example could be to mitigate regulatory or litigation risk - such as manufacturing companies investing in improving occupational health and safety standards, thereby reducing susceptibility to worker’s compensation claims and lowering insurance premiums. This results in better workplace culture, with more productive employees and better employee retention – all of which lowers future costs outlays.
However, when weighing up financial decisions, some executives may struggle to rationalise ESG spending, instead preferring to prioritise short-term results over long-term returns. Relying on traditional financial metrics such as Return on Investments (ROI) or Internal Rate of Return (IRR) would not support the cause either as they fail to capture the ‘unpriced’ cost - such as air quality, carbon emission or soil degradation. After all, companies don’t pay for services nature provides. If priced in, the numbers may reveal the consequential impact of droughts on crops, extreme weather impacts shutting down parts of supply chains, employees and customers facing hardship – all of which would hurt profits hard. According to insurance giant Swiss Re, not acting on climate will destroy around 18% of GDP by 2050, an equivalent to a deep economic depression.
The KPMG survey also revealed, global CEOs found it difficult to pick just one key driver when it comes to accelerating their companies’ ESG strategies. According to the results, social issues was ranked the highest (34 percent), followed by transparency (26 percent), inclusion, diversity and equity strategy (21 percent) and net-zero strategy (19 percent). This shows there’s a growing consensus that they all matter. One effective strategy, which we support, is a materiality assessment approach, that is to prioritise ESG issues that matter most to a company's success. Most of all, ESG capital spending initiatives needs to be adequately resourced to achieve intended outcomes and CEOs need to articulate their ESG steps and story – which more than one-third struggle to do, according to the survey findings.