As economic uncertainty looms, our latest KPMG 2022 CEO Outlook shows nearly nine out of 10 (86 percent) CEOs believe a recession will occur over the next 12 months — and many businesses have conflicting priorities crowding their agendas as they prepare.
Environmental, social and corporate governance (ESG) commitments are among those priorities. The year ahead is likely to test CEOs focus and resilience as they try to balance the short-term economic pressures with the longer-term ESG agenda. The survey results show that, in the short term, CEOs may slow down investments in many areas, including new headcount, digital transformation and ESG.
Managing a business in the short and long term is always a delicate balance. But businesses are key to solving the environmental and social issues that face us, collectively. We have a chance to learn from past mistakes and change the playbook.
What businesses produce, how they produce it, how they treat their people, their impact on their wider communities, where they choose to invest their money, and oversight of their supply chains all matter for our collective success (or otherwise) in tackling our ESG issues.
We’re entering the decade of implementation. Pulling back on investments in critical areas like climate change during tough economic conditions leads to a deepening of the issues, and often expensive corrections in the longer term. Which is why KPMG is doubling down on its investment in ESG capability. We have to be ready to prompt, encourage, lead and help businesses play their part in the biggest issue to confront our society for generations.
Recognizing the value of ESG
When it comes to doing the “right thing”, the findings reveal CEOs have progressed from considering ESG initiatives as merely feel-good actions to sharing that their ESG decisions are in fact central to business performance.
In my response to last year’s CEO Outlook results, I highlighted how some CEOs were still struggling to prove value despite their desire to lead on ESG. The emerging story from this year’s report demonstrates that ESG is increasingly becoming an intrinsic business imperative. Many CEOs are reporting that ESG positively impacts financial performance, growth and stakeholder expectations.
This year, there’s broad CEO agreement that ESG programs — balanced across social, inclusion, diversity and equity (IDE) and net zero — improve financial performance: 45 percent of CEOs agree to this, an increase from 37 percent one year ago. And when asked where CEOs see corporate purpose having the greatest impact over the next 3 years, nearly three-quarters (73 percent) say driving financial performance is their top choice. In fact, 62 percent of CEOs say they will be looking to invest at least 6 percent of revenue in programs that enable their organization to become more sustainable.
ESG is no longer a nice-to-have — it’s clearly a must-have.
And as global CEOs continue to see the impact ESG initiatives have on their bottom line, it’s hard not to see the relationship with increasing stakeholder expectations. CEOs increasingly understand that those businesses embracing ESG are better able to secure talent, strengthen the employee value proposition, attract loyal customers and raise capital.
Regulators driving future ESG action
While nearly half of CEOs believe ESG programs improve financial performance, not all CEOs are yet seeing this as core to business. However, stakeholders are increasingly likely to force businesses’ hands, and CEOs are keenly aware of increased scrutiny. This year’s survey shows a marked jump in demand from stakeholders — such as customers and regulators — for increased transparency. In fact, 69 percent of CEOs see stakeholder demand up a significant extent (from 58 percent in 2021), and 72 percent believe ESG scrutiny will continue to accelerate.
Regulators are among the stakeholders CEOs see driving the next wave of actions around ESG, regardless of the economic tides. Increased or frequently changing regulations are seen as one of the top two challenges CEOs face in delivering on their ESG strategy.
Consistency is key for CEOs. Many are asking for a level playing field — including common standards of reporting and assurance — to help businesses manage issues and for investors and stakeholders to be clear on an organization’s performance.
It’s no longer about understanding why change is important. CEOs are even more clear today about the business needs of the ESG agenda. Their challenge is balancing the short term with the long term and focusing on the resilience of their business — which includes risks like climate change and societal pressures — particularly as they navigate likely uncertainty in the months ahead.
I believe history will prove that ESG issues won’t slow down during a recession. We likely need to find the ways to navigate an economic downturn while addressing our most significant environmental and social challenges.