3 reasons why ESG is more important than ever in a recession

Sustainability and social responsibility are nonnegotiable in today’s economy.

By Chantal Contijoch and Tim Purtill

Whether you’re leading a Fortune 500 company or a small start-up, tough economic times require strategy reassessment. What about your ESG (environmental, social, and governance) responsibilities? How are you contributing to the health of our planet? How does your company help sustain and uplift communities? Are you leading in a way that garners trust? How are you leveraging ESG to differentiate yourself in a competitive marketplace that is otherwise focused on the bottom line? Your customers, employees, partners, and investors all want to know.

In uncertain times, it can be tempting to see ESG initiatives as a lower priority or a nice-to-have, taking a back seat to traditional profitability. You want to stay true to your business’s purpose and values, but during a recession you need to protect your business first, right? Cut costs, focus on your most profitable areas, ride out the storm. The truth is, ESG is a must-have, especially during turbulent times, and not just because it’s the right thing to do. Companies that build risk assessment and mitigation into everything they do stand out, as they are able to control costs while they meet their ESG obligations.

Investor’s Business Daily reports that in a down economy, companies that continue to invest in ESG are more likely to maintain profitability and sharpen their competitive edge. In the long term, ESG is a critical component of success through tangible actions that mitigate risk, diversify product lines, reduce costs, and attract and maintain top talent.

1. ESG drives risk resilience, cost optimization, and compliance

Risk resilience is increasingly critical for organizations to flourish during uncertain times. As societal, environmental, and economic challenges arise, organizations that can manage, predict, and prepare for disruptions are better positioned to thrive.

ESG helps you identify and plan for societal and environmental risks. As a result, your organization is more risk resilient and better positioned to thrive in a volatile economy. ESG initiatives can also help achieve cost savings and capture operational efficiencies.

ESG initiatives focused on Scope 1 (direct emissions) and Scope 2 (indirect emissions) reduction can lead to lower energy consumption and operational savings. For example, Slalom supported a client to identify route optimization opportunities that led to a 10,000 ton decrease in the company’s carbon footprint and $7.6 million in freight cost savings.

Focusing on ESG helps you avoid costly environmental and climate-related disasters. According to FEMA, about 25% of businesses don’t reopen after being impacted by natural disasters. An organization with a solid ESG program is better equipped to withstand natural disasters through preparedness plans. Plus, an organization focused on ESG may be less likely to experience an oil spill or chemical leak. Lower risk can mean lower insurance premiums, as insurers often offer discounts to organizations with strong ESG practices.

2. ESG drives talent retention

Strategic talent retention during a downturn is critical in ensuring top talent is retained and empowered to lead your organization during the more difficult periods and reducing the overall costs of rehiring when conditions improve.

ESG is a key factor in attracting and retaining top talent. Focusing on ESG can help you stand out from your competitors and appeal to the candidates you need to drive your organization’s success. Millennials and Generation Z are especially interested in working for companies that share their values and prioritize sustainability. Here at Slalom, according to an April 2022 survey, 79% of team members say that our internal ESG initiatives and external philanthropic investments positively impact their desire to stay at Slalom.

Both customers and employees value organizations with a strong ESG record. Great Place to Work® suggests that “when employees’ work has ‘special meaning,’ instead of being ‘just a job,’ they are 56% more likely to lean into innovation opportunities.” When an organization’s environmental, social, and governance goals align with employees’ purpose, it can create a path for increased performance and innovation.

3. ESG drives growth

Identifying and being successful in adjacent markets can be difficult, but ESG can create a framework for diversifying your product line and can even lead to entirely new revenue streams. Organizations focused on solving sustainability issues through their products and services can retain and attract customers and drive revenue growth.

When times are tough, people are looking for ways to save money, and organizations that can offer durable alternative and sustainable products and services are more likely to succeed. Both stakeholders and customers want to support products that are aligned with their values—exploring diversification through an ESG lens can help garner and maintain their trust while positioning you as an innovator.

Slalom helped an IoT manufacturer monetize existing data by creating an energy management software solution for their existing clients. This service enhanced customer stickiness by addressing their Scope 1 and Scope 2 opportunities and established a competitive advantage for new clients.

A study by Cone Communications showed that 83% of consumers would switch to a brand that supports a cause they care about. This means that companies that focus on ESG factors can attract new customers, even in a rocky economy. The same study also showed that 79% of consumers are loyal to brands that support a cause they care about, suggesting that organizations that focus on ESG can more easily retain current customers.

Answering the call

Year after year, the call for greater sustainability grows louder. Stakeholders want to know how you’re addressing viability, employees want their work to contribute to a greater purpose, customers want to patronize businesses that are aligned with their values, investors want to visualize your endurance, and partners want to maintain relationships with good stewards of the globe.

Chantal Contijoch is no longer with Slalom.