Are we in a “Sustainability recession”?

Are we in a post-Covid “Sustainability recession”?

(while the investor-focused ‘ESG’ gets caught up in the ideological and cultural wars of our day)

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Financial Times. Wall Street Journal. Fortune. HBR. ProPublica. Capital Brief.

Each one of them has been talking about the increased scrutiny on ESG and Sustainability.

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Recent news on companies abandoning association with Climate 100+ (HSBC), withdrawing from (SBTi) Science-Based Targets Initiative (Air New Zealand), announcing delays in their carbon reduction targets achievements due to Gen-AI energy guzzling needs (Microsoft), tech-industry pioneers on diversity pulling back on their DEI plans (Meta, Google), industry sustainability leaders pushing forward their circularity targets (Unilever pushing forward its plans to shift to biodegradable or recycled or returnable packaging from 2025 to 2030-2035), slashing their sustainability teams in much higher % as a part of larger cost-cutting initiatives (Nike), an entire industry of companies wiping out any trace of de-carbonisation goals from their website (Canada’s six largest oilsands companies), or even questions by experts (like Alex Edmans and Alison Taylor) on how does sustainability performance directly lead to (and not just correlate with) better financial performance.

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The pressure on companies for Sustainability and ESG is for the following reasons –

1)?????? Over-stating of sustainability claims or not giving enough thought to the magnitude of transformation to be carried out while they made their original claims a few years back.

2)?????? More pressure points to improve and standardise the quality of sustainability reporting, to ensure comparability of achievements.

3)?????? Getting caught up in the political, cultural and ideological wars through their public stands, campaigns or disclosures in general

4)?????? Relative under-performance of ESG equity funds compared to traditional funds. As not all sustainability investments lead to immediate positive financial results despite the repeated expectations from the sustainability teams to “not be cost-centers” and help the business “generate revenue”

While this happens, pressure is also put back from companies on to regulators and policy-makers (Like Air New Zealand push-back on the lack of right policies driving the shift to more sustainable aviation fuel).

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Which has been leading to / will now certainly lead to the following –

1)?????? Steep drop in mention of Sustainability and ESG on Earning calls.

2)?????? Fewer superficial or band-aid sustainability marketing campaigns (one of the good outcomes of the recent backlash), due to concerns about “peak ESG”

3)?????? Number of new funds by asset management with the “Sustainability” label have fallen drastically from 2021 onwards i.e. “Green-hushing”

4)?????? The term of ESG being dumped for “Sustainability” in public discussion and disclosures – or even the traditional terms of clean air, environmental externalities etc

And while this happens, the push on the framework-makers and standard-setters such as SASB, IFRS Foundation, GRI, CDP etc to create a globally integrated and accepted standard on sustainability reporting (which covers both enterprise value and climate change values and focuses on double materiality) will only increase.

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But corrective actions continue / need to continue, in these areas of sustainable business –

1)?????? Companies’ financial disclosures and annual reports continue to mention Sustainability with the same frequency, and this should continue in integrated, sustainability and financial reports alike.

2)?????? Continued recognition that investing in/for sustainability aids medium term reputation building and long-term value-creation, and not always address every short-term desires.

3)?????? The need now for moving beyond policies, risk identification and disclosures into tangible actions for change in the delicate balance of environment, society and economic growth.

4)?????? Cross-competitors and across supply-chain coalitions in setting industry standards and codes for suppliers (so that only the industry-leading company is not left behind in the profitability battle, while attempting to be more sustainable).

?And while this happens, in anticipation of Europe’s Carbon Border Adjustment Mechanism (CBAM), which is bound to spread across the world over the next decade, a timely internal carbon pricing mechanism is required within companies (Danone is a known name which leads on this, and 20% of companies across USA and Europe now do have at least some basic versions of an internal carbon pricing in place).

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So, are we really in a “sustainability recession”? The future for serious sustainability change-makers is indeed positive, as now the focus will rightfully be on more tangible sustainability actions, scale of competitor brands working together to embed sustainability across the value-chain and raise the “industry floor” on sustainability, embrace better climate risk and related risks assessment and more cross-industry standardized and comparable sustainability standards and frameworks.

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And while this transformation continues, watch out for business leaders who justify wafer-thin sustainability teams by saying that “sustainability is everyone’s jobs” – just like in public policy and governance, even in companies, it can only mean that “no one is accountable for it”. Let that be a dream for a few decades into the future, when company’s have already matured to embed sustainability into their operations.

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As the co-author of Net Positive, Andrew Winston, puts it best, “We are acting on climate change not to please Greenpeace, but because it’s a real and worsening threat”. The science is undeniable, now let’s get the finances in place to complement it.

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