A study published last week by Gartner looking at how inflation is affecting CFO investment priorities, caught our eye. Of the investment categories explored in the survey, it found that 39% of those interviewed would look to cut investment for improved sustainability and reduced environmental impact during a period of margin squeeze from high inflation, talent shortages and supply constraints. This was second only to M&A.

This is particularly surprising given how quickly ESG has become a key strategic priority for corporates, the capital markets, and legislators alike. What was equally daunting was that 33% of companies would also reduce investment in workforce and talent development, ranked as the third cut, despite the widely reported and recognised talent shortage.

In the subsequent media coverage, the following response stood out. The FT’s Moral Money, on 27 July 2022, quoted Cheryl D’Cruz-Young, a senior recruitment partner at Korn Ferry as saying: “Those [companies] who are only paying lip service will likely cut ESG staff.”

To our mind this sums up the situation. If ESG is not seen as a commercial driver for the business and valued enough internally, it is easy to see why it is likely to quickly fall under the budget knife. Too often, ESG is bracketed in other budgets, like marketing or communications, which are often the first to be reviewed when recession looms.

From an environmental perspective, the threat to business resilience from climate change and the demands to reduce their carbon emissions is not going to lessen during tougher economic times. Undoubtedly, other issues will understandably rise to the top of the corporate agenda during times of margin pressure. But, when we return to a more favourable economic outlook, the challenges of climate change will only have got worse. Those businesses who have reduced the pace of their transition to a low carbon emissions model will find themselves at a severe disadvantage. This is the time to maintain the pathway to net-zero, not to slow it down. Those companies that take their environmental responsibility seriously and have made the effort to understand how material it is to long-term success, will inevitably continue to build it into strategic, operational and investment plans.

From a social standpoint, talent retention and attraction are huge areas of competitive advantage. The rise in influence of ESG over the past decade is partly explained by the increased understanding of how the behaviours of an organisation affect wider stakeholders and the treatment of employees plays a major part. This is particularly the case when looking at the engagement and purchasing decisions of younger, more informed, audiences who make up an ever-increasing part of the workforce, the savings market and consumer spending. How a company looks after its employees during this tough economic period is going to test every company’s stance on ESG, but investment in talent and the workforce will be key. The approach that management teams have to their people will not only influence their ability to maintain talent but will also have a far longer-term impact on their ability to attract it in the future. Also, with ever higher levels of transparency, companies that cannot demonstrate care and investment in their people will lose out competitively in the future as the willingness to engage with their organisation, products and services will be impacted.

Leadership teams must continue to balance investment in the long-term sustainability of their businesses, against the focus on shorter-term financial consequences. Much has changed since the last downturn in understanding the drivers of corporate value. Any company that has reported on their positive environmental or social intentions should revisit those statements before they consider cuts in investment in their environmental or social responsibility or their people. If they have treated ESG as tick-box or marketing jargon, they should still beware the repercussions of breaking promises. Those, who from the beginning have embedded it as part of their long-term commercial strategy will maintain that investment and reap the rewards.