The ‘sustainability recession’ will end soon—and not by choice
It’s possible that most of the ESG pullback is for show—a reverse form of virtue signaling.
Corporate sustainability is struggling. We’re in what my colleague and sustainability thought leader John Elkington calls a “sustainability recession.” I think of it as a malaise, and it feels like moving through molasses.
Sustainability, as well as the related, but different ideas of Environment, Social, and Governance (ESG) and Diversity Equity and Inclusion (DEI), had become something no large company could ignore. Even through the pandemic, these concepts gained steam, with multinationals setting bold carbon goals and launching big initiatives to reduce inequality.
However, something has gone wrong and most companies have gotten much quieter about their sustainability work, something so common it has a name: Greenhushing. Stories of backtracking are accumulating. So far this year, some big banks pulled back from sector-wide climate commitments, many companies and countries are missing their targets, and some high-profile leaders have laid off their sustainability people. Sustainability remains on the agenda, but it’s clearly gotten less important.
Besides the obvious macro trends that have sucked up attention—like the once-in-a-century pandemic, a new war in Europe, and unprecedented supply chain disruptions—there are deeper reasons for the slowdown.
Increased regulation and reporting requirements. This has increased the focus for some companies but, ironically, it has slowed action. It’s drawing so much time and energy, companies can’t do as much of the real work. And it’s causing a rush to the middle: Companies that had done very little now have to get at least going on measurement and reporting. But for companies that were already doing more, there’s now a nice excuse for the C-suite to focus mainly on getting the reports out. They can check the box and say, “Look, we’re doing this sustainability thing.”
The emergence of AI. It turned out that sustainability was not easy. So, when a big, shiny new object like AI came along, and it’s a black hole of attention and investment, sustainability was moved to the back burner.
Sustainability became a political football. In the U.S., state and local politicians have tried—and mostly failed—to hinder investors from putting money into “ESG funds.” It’s part of an attack coming almost entirely from the right. Companies found themselves facing angry blowback for doing things that they thought made sense for the business and fit their values, like defending LGBTQ+ rights (see Disney) or daring to sell to the gay and trans communities (see Target and Bud Light). Whether these companies handled this well is a larger debate, but either way, they’ve been important canaries in the culture war coal mines.
Of course, it’s possible that most of the pullback is for show—a reverse form of virtue signaling to demonstrate to investors that the companies are serious about making money. Companies could be continuing their efforts quietly. It’s probably too early to tell if there’s been a true slowdown in action and outcomes. Laying off sustainability people isn’t a great leading indicator, but it’s also possible that for some companies, some of the core work is embedded in the organization and moving along.
For example, decarbonizing operations and shifting to more sustainable products are multi-year efforts, and many are hard to stop. Companies are signing decade-long power purchasing agreements for cheaper renewable power, or shifting manufacturing and R&D toward the clean economy (see the auto industry). Capital is out the door already. And on the issue of DEI, shifting the demographic mix of your leadership and board has its own momentum.
All that said, let’s admit that corporate sustainability is not enjoying a moment in the sun. But it will be back, and with a vengeance, for a few core reasons. Most importantly, contrary to what talking heads and politicians may say, the drivers of sustainability have not been primarily political or progressive. The issues companies and governments are responding to are very real—and growing more serious.
In short, we’re acting on climate change not to please Greenpeace, but because it’s a real and worsening threat. Put simply, there is climate change. It’s threatening humanity and costing businesses and economies a lot of money—a new study from Germany’s Potsdam Institute estimates a 19% hit to global GDP, or $38 trillion annually by 2049. This translates into serious costs for companies and communities.
Also, climate work will come back (or continue) because taking action is getting radically cheaper. There’s a misconception about the clean economy. It’s not an environmental movement; it’s a market and technological shift. As clean tech advocate Ramez Naan points out in his TED talk, solar, wind, batteries, and more are not commodities that fluctuate in price—they “are technologies and they drop in cost like technology.” Clean tech is fundamentally heading in one direction: cheaper.
It’s now much more profitable to do something about climate than to watch it happen (not for everyone of course – fossil fuel companies will either become renewable energy and carbon sequestration companies, or go the way of horse and buggy and Blockbuster).
And how about the other political football, diversity and inclusion? It’s also based on a core reality: The world is getting more diverse. In the U.S., the under-20 crowd is at a tipping point—white people are a plurality, not a majority. Look at your Gen Z kids and new co-workers. They are markedly more diverse in terms of demographics, sexuality, gender, and more. What kind of company does not try to attract new talent or create products and services for young and growing customer bases? One that does not intend to be around for long.
Some of the more advanced sustainability agenda items, like living wages, may take some more time now. But you never know how issues will weave in and out of society’s consciousness. The AI revolution is causing tech leaders to talk more about wages and advocate for “universal basic income,” which is about as advanced as sustainability gets (and radically progressive).
Companies will also make their way back to sustainability because they have to. The regulations aren’t going away. A recent Accenture survey found that 90% of global CFOs expect ESG issues to be a major focus over the next five years. Also, investors aren’t letting it go. BNP Paribas recently said it will require companies it invests in to put climate action into executive compensation metrics. But that’s the stick. The carrot is even bigger. Getting back on the sustainability horse is the right thing to do and it’s good for business. Much of the sustainability agenda pays back in the short and medium run and, by definition, it’s good over the longer run. There’s not much business to be done on a dead planet with unhealthy people.
I’ve been in sustainability long enough to see multiple waves come and go, with each successive recommitment at a higher, more intense level. Wise companies will keep plowing through this quicksand and prepare for the next wave.
In The Terminator, just seconds after Arnold Schwarzenegger famously says “I’ll be back”, he drives a car into a building. Sustainability is coming back—perhaps in an electric vehicle this time, so you might not hear it coming. But you might want to jump in.
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