Why ESG Companies Are Better Equipped to Weather an Economic Storm During an economic downturn, leaders may be tempted to scale back on ESG efforts, but the temporary savings could hinder a company's long-term success.
By Angela Willard Edited by Chelsea Brown
Opinions expressed by Entrepreneur contributors are their own.
I co-founded my company in 2009, at the tail end of a recession. My partner and I were selling products rooted in plant-based medicine, and as such, felt compelled to ensure our business gave back to the environment it was benefiting from. But it wasn't just an external commitment.
When there's an economic downturn, there's also a downturn in mental and physical health. A lot suffers in the communities we live in, and we recognized early on the importance of creating a company where our team felt a sense of purpose and belonging.
Like many startups, we had to work tirelessly amidst economic restraints, to find our market fit and navigate the logistics of a product-based business. What fed our energy and motivation during those early days of uncertainty was the affirmation we received from our team, customers and key stakeholders who understood our vision for having a positive social impact.
As of 2020, 88% of publicly-traded companies and 67% of privately-owned companies had ESG initiatives in place. During an economic downturn, however, companies are forced to make hard financial decisions. Scaling back on ESG can be tempting in an effort to balance the books, but companies that do so may find the temporary savings are greatly outweighed by the loss in stakeholder alignment.
I've learned from experience that ESG-focused companies are often better equipped to weather the storms of a downturn. Here's why:
Related: Why ESG Conscious Companies are Resilient Companies
Operating with purpose strengthens stakeholder relations
In those early days when we were just building important relationships with our customers, vendors and partners, it was our mission — to have a positive social impact — that distinguished us from our competitors.
Not only did our ESG vision create brand loyalists and word-of-mouth marketing for us at a time when budgets were tight, it opened up doors to partnerships we might not have otherwise secured. For example, a global supermarket chain that's historically difficult to get into approached us before we were even ready to fulfill the demand required to be on their shelves.
Nearly 80% of consumers say they will stop buying from companies that treat the environment or people poorly, and 83% believe companies should be actively shaping ESG best practices.
This major shift towards supporting values-aligned businesses also helped us during the pandemic when supply chain issues caused global shortages. Many of our suppliers chose to continue to source to us — even with the limited amounts of supply they had — because they aligned with our ESG standards.
When there's a downturn, your profit and growth might be temporarily stalled. Having motivation beyond profit can create a sense of stability and assurance in your company's long-term vision that attracts more stakeholders to buy in.
Related: 5 Big Mistakes Companies Make When Tackling ESG
Creating sustainable conditions prevents employee burnout
Before ESG, there was "triple bottom line" and "corporate social responsibility." Just as the name has evolved, so has the definition. Increasingly, companies are recognizing ESG also encompasses the treatment of employees.
Workplace burnout has been steadily on the rise since the onset of the pandemic, with nearly 50% of employees and 53% of managers reporting they're burned out at work, according to a new study from Microsoft.
As a wellness company, the health of our employees is critical. For us, investing in ESG also means creating processes to ensure work conditions are sustainable. This involves creating a culture where key questions are asked: Is this a sustainable workload? Is the timeliness of this project or task realistic? Is the remuneration for this position fair for what we're asking in return?
One way we've tried to ensure these policies are upheld is by investing in emotional-intelligence training for our employees. The experience employees have at work is greatly linked to their energy, motivation, productivity and performance. It also greatly affects their overall quality of life, which can be stretched thin during a recession.
Lastly, by creating a sustainable environment for employees, you're more likely to attract and retain top talent — a key advantage in any economy.
Related: 3 Steps for Making a Positive Environmental, Social and Governance (ESG) Impact
The days of corporate greenwashing are numbered
In an effort to keep afloat during a recession, some companies may get louder about their ESG impact in ways that can mislead the public. This concept of greenwashing is prevalent — a 2022 Harris Poll found 58% of leaders globally and 68% of leaders in the United States admit their companies have overstated their sustainability or greenwashed at times. But the risk of damaging a brand's reputation through exposed greenwashing, is quickly becoming greater than the reward.
Not only are governments and policymakers starting to crack down on greenwashing, but consumers are also doing their own research — armed with social media, they're calling out organizations that don't measure up to the ESG values they espouse.
One of the best ways for businesses to amplify their ESG impact in a fair and transparent way is to look for certifications that are representative of the values they're embodying. In our business of wellness, for instance, it's critical that a product be tested, researched and ethically sourced if we're suggesting it's therapeutic for someone.
Regardless of your industry, there are certifications like B Corp or certified organic that offer third-party credibility and consumer assurance. Companies can also publish an annual impact report that offers a transparent look into their ESG efforts.
Building a socially-responsible company is a long game — the return doesn't always involve monetary gains upfront. While the need for profitability can be amplified during a recession, it shouldn't come at the cost of a company's social impact. When businesses invest in ESG value systems and policies, they create more scalable and successful organizations that better service all stakeholders for the long term.
