Insights for What’s Ahead

• While profit making is not guaranteed for businesses during a recession, expect companies and investors to shift their focus to greater sustainability efforts. The key components of sustainability—making operations more efficient; reducing waste; communicating effectively with customers, staff, and supply chains; identifying risks; and devising strategies for the long term—will all lay the foundation for businesses to survive the tough times and grow as soon as conditions allow. Investors will increasingly seek business models that value sustainability strategies.
• Recognize that the elements of a robust sustainability program can help during a crisis. At the outset, companies should assimilate UN Sustainable Development Goals (SDGs) into their culture. While sustainability disclosures and reporting contribute significantly to the process, the hallmarks of a strong sustainability program include a defined corporate purpose and a clear understanding of materiality (i.e., which issues truly matter to a company’s and its stakeholders’ long-term welfare). Taken together, these provide guardrails for decision-making during a time of heightened uncertainty. By their very nature, effective sustainability programs also require a high degree of horizontal collaboration across an organization, an openness to innovation and ideas that come from unconventional sources, and an ability to “look around the corner”—all of which can speed the response and spur innovation during a time of crisis.
• A sustainability strategy is as much about innovation as it is about risk reduction. Time is a critical factor while stepping up sustainability actions when there is a forecast of an impending recession. Companies must analyze emerging risks to prepare themselves for the myriad challenges of a recession, and a delay in implementing sustainability strategy changes can lead to missed opportunities or even higher risk exposure. When it comes to a sustainability strategy, a culture of collaboration can be a catalyst for innovating solutions to society’s thorniest challenges.

The latest economic forecast for the Euro Area from The Conference Board is sobering. In the near term, GDP growth is expected to slow significantly toward near stagnation, with the 2023 Euro Area GDP forecast downgraded to 1 percent growth following 2.7 percent growth in 2022. Low confidence and high inflation will slow consumer spending, but a strong labor market (plentiful jobs and wage gains) and fiscal support may prevent an outright contraction.

Predictably, some voices are calling for a rollback on sustainability measures; for example, conservative lawmakers with the center-right European People’s Party (EPP)^[1] want a “regulatory moratorium” on green legislation after the EU passed the current “Fit for 55” package of climate legislation in 2021.

Lessons from previous downturns demonstrate that companies that place sustainability at the core of their corporate strategies are better positioned to weather downturns

For example, a study carried out after the 2008–09 financial crash considered the fortunes of 180 US companies, half of which identified as “high sustainability companies,” defined as having environmental and social sustainability as core to their strategies. The others were categorized as “low sustainability companies” since they focused only on profit maximization, with environmental and social sustainability seen as external to their corporate strategy. The analysis found that high sustainability companies recovered from the 2008–09 recession much more quickly. In 2008, the return of $1 invested in these companies in 1992 hit a low of $14.39 but rose to $22.58 by 2010. Meanwhile, $1 invested in the low sustainability companies was worth $8.14 in 2008 and rose to a high of $15.35 in 2010.^[2]

Sustainable companies could also be said to be more resilient

This is certainly the view of BlackRock, one of the largest asset managers globally, which has carried out research demonstrating a correlation between sustainability and traditional factors such as quality and low volatility, which themselves indicate resilience. “As a result, we would expect sustainable companies to be more resilient during downturns,” it states in an article from 2020. It found that the majority of ESG-tilted portfolios outperformed their nonsustainable counterparts during the 2020 market downturn. BlackRock also found that investors showed a preference for sustainable assets to rebalance portfolios during the COVID-19 crisis.

In the first quarter of 2020, global sustainable open-ended funds (mutual funds and exchange-traded funds) brought in $40.5 billion in new assets, a 41 percent increase year over year. US sustainable funds attracted a record $7.3 billion for the quarter, which BlackRock said suggested a persistence in investor preferences toward sustainability.

Government policies favor green initiatives

Governments worldwide approved stimulus packages that funded energy efficiency, renewable energy, and social and health program following the financial crash.

Subsequently, in a 2020 report, the UN Environment Programme looked at what lessons from such stimulus programs could be taken forward to the COVID-19 crisis.^[3] In the wake of the pandemic, many governments evidenced interest in green industrial policy. The report noted that a competitive “green race” had broken out over global dominance of several key sectors, such as iron and steel manufacturing, electricity distribution systems, and low-emission and electric vehicle manufacturing.

The COVID-19 crisis has led to NextGenerationEU—the largest stimulus package ever financed in Europe—with a more than €2 trillion investment to build a greener, more digital, and more resilient Europe. Companies with strategies that fit these criteria will be well placed to benefit from this funding, allowing them to boost resilience and competitiveness.

The upshot

Let us be clear: with recession on the horizon, eco-conscious efficiencies in operations and across the value chain can help cut costs and should be prioritized. For many companies, this moment can also provide an important wake-up call: the resilience that a sustainability strategy offers is not a nice-to-have, but a must-have to remain competitive and relevant in uncertain times.^[4] While the precarious economic outlook will force leaders to introduce tactical measures that may not be seen as green (e.g., roll back on power generation from coal), these are necessary steps to ensure that long-term momentum isn’t lost.