Recent backlash caused by a fractured political climate has led some CEOs to reconsider their environmental, social and governance (ESG) initiatives, with 59% of CEOs surveyed by KPMG saying they planned to pause or reconsider their ESG efforts from Q4 2022 into Q2 2023. And yet 70% of those same CEOs say that ESG programs improve financial performance, up from 39% the prior year. This shouldn’t be a political issue. The business case for continued, increased investments in ESG policies is clear. To CEOs who are thinking about stepping back at this stage, I say you aren’t acting in the long-term best interest of your shareholders.
Advancing practices that are consistent with a healthy planet and a healthy population is good business. Through Grads of Life — which partners with Fortune 500 companies to advance racial and economic equity as well as drive systems change – we’ve done extensive research into the actions that lead to better ESG practices and advance diversity, equity and inclusion goals. For example, in partnership with the Business Roundtable, we created a comprehensive impact measurement framework for skills-based practices. We’ve evidenced firsthand the effect that thoughtful ESG practices can have on employees, businesses and communities.
So why pause or reconsider when it comes to ESG? One challenge is proving the return on investment given the lack of accountability and standardization — for some companies, investing in ESG initiatives is just a matter of putting up a few banners on their website with vague proclamations.
The true leaders in this space have systems and mechanisms to measure the impact of all their ESG initiatives in terms of profits, productivity, hiring, retention, customer sentiment and other key performance indicators. With the update to the SEC’s ESG human capital disclosure framework expected this year, these organizations are ahead of the curve, setting up their stakeholders and shareholders for long-term success. Everyone else will need to catch up or risk litigation and reputational damage.
Here’s what we do know:
- A review of 200 studies by Oxford University and Arabesque Partners showed that good sustainability practices were positively correlated with stock performance in 80% of the analyses. In addition, according to Nielsen, 75% of Millennials are willing to change their buying habits to favor environmentally-friendly products — a clear win for consumer goods companies that prioritize sustainability.
- According to an analysis by McKinsey & Co., the most ethnically and culturally diverse companies outperformed the least diverse companies by 36% in terms of profitability in 2019.
- A JUST Capital survey published last year found that 73% of Americans — including 53% of Republicans and 91% of Democrats – agree that large U.S. companies have a responsibility to help solve societal problems such as climate change and racial equity.
- Burning Glass Institute’s American Opportunity Index showed how corporate practices have a deep impact on their employees’ careers. Even though two-thirds of companies do well for their employees in at least one domain, all companies across all sectors in the Index have room for improvement.
- A Deloitte meta-analysis showed that good governance practices such as an active oversight role of owners and boards leads to a positive effect on performance.
We also know through our work with OneTen, an organization committed to closing the opportunity gap for Black talent in America, that an increasing number of CEOs are prioritizing ESG practices that lead to both business value and social impact. Launched with 37 CEOs and companies across industries, the coalition now has 70 members, with CEOs investing both money and time into developing more inclusive talent practices. At a recent quarterly CEO gathering, the main topic of discussion was around sponsorship and mentorship to move beyond hiring into advancing Black talent to leadership positions.
The link between ESG and business performance will only grow with changing demographics, more international trade of goods and services, and an increasingly warming planet. Pausing on ESG initiatives is short-sighted, reactionary, and irrational. Let good long-term corporate practices triumph over short-term political point scoring.
Gerald Chertavian is founder and CEO of the workforce development organization Year Up and principal at the consultancy Grads of Life.