CEOs Cutting Back or Pausing Their ESG Efforts

Despite U.S. companies championing their environmental, social, and governance (ESG) investments and results, many others are planning to suspend or reconsider their ESG efforts in the coming months over growing recession fears, according to a new report. 

In August, KPMG published an in-depth report titled “2022 U.S. CEO Outlook.” It assessed a wide variety of issues facing businesses over the next 12 months, including economic turbulence, finding and retaining talent, and technological developments. The paper also looked at the ESG trend sweeping America and the rest of the world. 

The authors of the report noted that a majority of CEOs (79 percent) think the public will look to the private sector to address major social challenges rather than governments, be it climate change or income inequality. But while this form of social investing has become integral in the private marketplace, organizations acknowledged that there is a demand for increased reporting and transparency on ESG issues, particularly as more of the public becomes skeptical over “virtue signaling” and “greenwashing.” 

The former consists of a business expressing a specific moral viewpoint to communicate an impeccable character, typically one that favors an establishment talking point. The latter is when consumers are deceived into thinking a company’s products are environmentally friendly or socially responsible. 

Fumes emit from factories of Keihin Industrial Area in Kawasaki, Japan, on Dec. 1, 2009. (Koichi Kamoshida/Getty Images)

But the key finding from the report was that 59 percent say they “plan to pause or reconsider their ESG efforts in the next six months” to help prepare for the anticipated recession. 

The report suggested that diminishing investment in ESG strategies “may lead to long-term financial risk,” as a possible recession tests CEOs’ commitment to the latest craze in Corporate America. Seventy percent of CEOs noted that ESG has improved their firms’ financial performance. 

“As CEOs take steps to insulate their businesses from an upcoming recession, ESG efforts are coming under increasing financial pressure,” said Jane Lawrie, global head of corporate affairs at KPMG. 

Eighty percent of CEOs expect a recession within the next 12 months, according to the KPMG survey. 

Is ESG Still a Priority?

Central banks worldwide have abandoned their pandemic-era easy-money policies, with market experts warning that these tightening efforts will lead to an economic downturn in either 2023 or 2024. This type of climate will make borrowing more expensive, forcing companies and investors to tighten their belts and be more conservative with their dollars and cents.

Will ESG still remain a top priority for businesses and traders in such a fiscally prudent environment?

While speaking at CNBC’s Delivering Alpha Conference in September, Lauren Taylor Wolfe, Impactive Capital co-founder and managing partner, explained that financial performance is the chief objective for companies.

“We believe that ESG without returns is simply not sustainable,” she said. “We are exclusively focused on risk-adjusted returns.”

Meanwhile, a broad array of studies points to greater skepticism and less enthusiasm over everything related to ESG.

A recent Capital.com poll, for example, found that investors and traders are not prioritizing ESG. The online brokerage firm’s research indicated that 52 percent never picked a stock based on ESG factors. Nearly half (46 percent) reported not knowing how to do so, while 12 explained that ESG investments were too expensive. 

A separate survey from global investment manager Ninety One discovered that 55 percent say the risk and return performance of their holdings remained the chief concern. Interestingly enough, 40 percent of asset purport that investing in funds related to ESG goals, such as climate change, will cause a reduction in their returns. 

Many states across the country, including Florida, Arizona, North Dakota, West Virginia, and Kentucky, have rejected ESG strategies, divesting billions from financial institutions that make investment decisions based on the system. Wall Street appears mixed on the issue, with 45 percent of CFOs telling a CNBC survey that they supported the moves. Thirty percent stated they were neutral, while 25 percent opposed these decisions.

“I think the criticism is deserved,” Wolfe added.

Last week, Strive Asset Management, led by activist investor Vivek Ramaswamy, launched a nationwide campaign that aimed to “promote excellence over ESG priorities.” The initiative suggests that some of the world’s largest companies, such as Amazon, Citigroup, ExxonMobil, and Home Depot, maintain “untapped potential” that could be unleashed if they were not beholden to ESG.

“Everyday Americans have extraordinary yet unrealized power at their fingertips,” said Ramaswamy in a statement. “They don’t just vote as citizens at the polls in two weeks. They vote every day with their investment dollars, which are too often used by other asset managers to inject political agendas into corporate America’s boardrooms.”

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Andrew Moran has been writing about business, economics, and finance for more than a decade. He is the author of “The War on Cash.”