This year may see corporate environmental commitments take one step back says, John Quelch, Professor of Business Administration - Emeritus at Harvard Business School.
“If there's a trade-off between continuing your environmental commitments and putting your employees at risk of being out of work because the company does not perform well, I think we know what the trade-off would be.”
S&P Global’s report on sustainability trends in 2023 states that a push-and-pull dynamic will be the hallmark of sustainability-related decisions because of new tensions like geopolitical turmoil, inflation, recession, and climate change.
It predicts that 2023 will test the strength and depth of sustainability commitments and priorities of companies and investors. Stakeholders will therefore have to play a delicate balancing act between managing near-term risks and making meaningful progress on longer-term sustainability.
Although in the boardroom, there might be some sentiment to backpedal or downplay ESG commitments in the interests of profitability, in actuality, the public pressure and the publicity associated with commitments that the company has already made are probably going to be sufficient to minimize any such backpedalling.
For instance, several global oil and gas companies have reduced their commitment to reducing fossil fuel production due to rising oil prices and windfall gains. Many businesses in other sectors are also viewing their energy transition goals with near-term considerations like energy affordability and energy security to stay competitive and profitable.
“Driven by short-term profit targets, some companies and directors communicate more robust commitments than they have any intention of meeting, and others have rolled back their commitments. These may allow for short-term wins for the companies and their shareholders at the expense of tremendous – even existential – societal losses,” says Lisa Sachs, Director of the Columbia Center on Sustainable Investment.
This is made worse by the existing gap between the intention and execution of corporate environmental commitments. The Corporate Climate Responsibility Monitor 2023 found that most of the 24 major multinational companies it studied have ambiguous climate commitment strategies and their offsetting plans lack credibility. It found that their climate pledges for 2030 fall well short of the economy-wide emission reductions required to stay below the 1.5°C temperature limit. Together, these companies account for 10% of the total revenue of the World’s top 500 companies (USD 3.16 trillion in 2021).
Companies that explicitly tie their ambitions and commitments to achieving society’s climate, biodiversity and environmental goals, including by mitigating the companies’ impacts on the planet, will be rewarded.
All these developments come at a time when there is a clear moral and business case for environmental commitments to be strengthened and not weakened. So how can businesses balance the act between short-term targets and long-term impact?
“Wärtsilä, established in 1834, has been through a number of upheavals and profound changes in its operating environment. While all businesses must take care of their short-term strength, long-term thinking is also embedded in our approach,” explains Kari Hietanen, Executive Vice President, Corporate Relations, and Legal Affairs, Wärtsilä.
“Our Set for 30 Programme about decarbonisation is not subject to short-term revisions. We also partner our customers for the long term in helping them through their green transition in the energy and marine markets.”
Studies reveal that the stocks of companies with high ESG performance were more resilient in times of market-wide financial crisis because investors view ESG performance as a signal of risk mitigation and future performance in times of crisis.
Another study on the subject says social capital is like an insurance policy that pays off when investors and the overall economy face a severe crisis of confidence. For instance, during the 2008–2009 financial crisis, firms with high social capital gave investors 4-7% higher returns than those with low social capital proving that it plays a vital role in corporate performance.
“Companies that explicitly tie their ambitions and commitments to achieving society’s climate, biodiversity and environmental goals, including by mitigating the companies’ impacts on the planet, will be rewarded. Corporate leaders that can look beyond quarterly profits will recognize that potential,” says Sachs.
Experts say the goodwill and interest that the private sector has attracted will also act as an added incentive to continue to prioritise environmental commitments.
“Although in the boardroom, there might be some sentiment to backpedal or downplay ESG commitments in the interests of profitability, in actuality, the public pressure and the publicity associated with commitments that the company has already made are probably going to be sufficient to minimize any such backpedalling,” says Quelch.
We believe that contributing to this change is not only good for the world, but provides a solid business for our company also in the future.
An analysis of more than 1000 studies on ESG and financial performance (between 2015 and 2020) by NYU Stern and Rockefeller Asset Management found that good corporate management of ESG issues typically results in improved operational metrics such as ROE, ROA, or stock price.
What’s more, some ESG strategies have also generated excess returns for investors when compared with conventional investment strategies and provided downside protection during economic or social crises.
Hietanen explains this with Wärtsilä’s example. “As a technology company, Wärtsilä’s strategy is to shape the decarbonisation in the marine and energy sectors. This requires R&D investments and profound understanding of the need of the industries and societies to change,” he says.
“We believe that contributing to this change is not only good for the world, but provides a solid business for our company also in the future.”
Experts believe that the pursuit of profit alone will no longer guarantee success. Climate change regulations are becoming more stringent. Employees, customers, and stakeholders are expecting corporations to take more responsibility for society. The future clearly belongs to companies that care and want to move forward on their climate commitments.