Uncertainty is one of the predominant themes in corporate spaces and conversations these days. While predictions on if and when we will enter a recession remain in flux, the economy has certainly slowed, and corporate leaders face pressure to keep costs down and profit margins up in the near term. Immediate cost-cutting measures are spreading across industries, including mass layoffs, salary freezes and reductions in employee fringe benefits, and a slowdown in capital projects.
This uncertainty has created a perilous environment for corporate social impact. DEI, CSR, ESG, and purpose initiatives are often first on the list to be frozen or underfunded during recessionary times. Cutting costs on these initiatives can feel like an easy decision for companies who see social impact as a “nice to have” or simply a box they must check based on political and societal pressure. However, this thinking has proven to be short-sighted, as research has shown that sustained investment and focus on social impact aspirations not only enhance the potential to drive meaningful change, but also contribute to business value and long-term resiliency.
We are seeing these short-term decisions play out in real time. A 2023 McKinsey analysis of racial equity commitments found that the pace and breadth of monetary commitments has slowed since it spiked in 2020 following the murder of George Floyd and an increased national spotlight on racial injustice. Monetary pledges are down 32% since 2021 and are coming from only 8% of companies, compared to the 18% that made pledges from May to November 2020. DEI related job listings are down 19% over the last year, and we are also seeing a decrease in companies publicizing diversity initiatives. More potential cuts are on the horizon—in response to a recent KPMG survey, 59% of CEOs said they may pause or reconsider their ESG efforts due to financial pressure.
At the same time, there has also been a mounting backlash to ESG, with Republican politicians taking a more vocal (and misleading) public stance against the practice, saying it is putting impact ahead of profit at a time when the economy is flagging. Silicon Valley Bank’s focus on ESG and DEI has already been used as a convenient scapegoat in its recent collapse (ignoring countless other, legitimate factors), signaling what will likely be an uptick in this type of rhetoric as we approach the 2024 election cycle.
While this moment can feel disheartening, we believe that forward-thinking companies can leverage these circumstances as an opportunity. This isn’t the first economic cycle companies have been through, and it won’t be the last. Companies that stay the course and/or double down on their commitment to addressing some of our world’s most persistent challenges will differentiate themselves from peers both now and well into the future because:
1. Disinvesting in social impact erodes trust from stakeholders
Consumers, employees, and investors have increasingly demanded that companies take a more active role in addressing social and environmental problems. Many companies have embraced the idea of having a purpose beyond profits, recognizing that firms who generate positive value for people and the planet are often more attractive to stakeholders. However, abruptly disinvesting in social impact can break down trust with customers, employees, investors, and communities.
It takes time to establish brand loyalty and trust, which can be challenging to regain once lost. Customers and employees who were attached to a company’s social impact commitment may feel disillusioned. Investors who see social impact as an important part of the company’s value proposition may lose confidence in the company’s ability to deliver sustainable long-term returns. Community partners, who have often invested significant time and resources to collaborate with a company, may feel that their efforts have been wasted or taken for granted. Even if a company recommits to its social impact goals when the economy bounces back, stakeholders may become skeptical of a company’s authentic motives and less likely to support it in the future.
2. Business gains from social impact cannot be achieved through interim solutions or strategies
By tackling social and environmental challenges through their business, companies often unlock new forms of innovation that can drive business value. This can occur by identifying new products and services that better meet the needs of a market they previously haven’t served, introducing more sustainable practices that also reduce costs in business operations, or attracting and retaining employees who seek purpose and social impact in their work.
However, achieving business gains from social impact requires a long-term approach, rather than interim solutions or strategies. Companies are well-versed in the fact that many business investments take a while to prove out, recognizing that they will never see financial return if they give up when hitting the first bump in the road. As an example, consider the 10-year R&D cycle required for new pharmaceuticals. Research has proven the value of a long-term approach even in times of crisis. Notably, McKinsey found that companies who maintained their innovation focus during the 2009 financial crisis outperformed the market average by over 30%, continuing to deliver accelerated growth in the subsequent three to five years. This same dynamic has proven true for value-creating social impact strategies. Research has shown that companies are more likely to see measurable business value when they have a sustained focus on persistent societal challenges, such as climate change or the wealth gap, and embed this focus into their core business strategy.
In his recent letter outlining the unconventional move to shift ownership of Patagonia to a trust and nonprofit, founder Yvon Chouniard emphasized how important the long-term view has been for the company’s positive impact and success, noting: “Instead of looking for immediate financial results from ESG initiatives, leaders must adopt a longer-term view and think about the impact on brand and market value. This is certainly the case with Patagonia, which is known for its loyal customer base who sees the brand, its products and its commitment to environmental advocacy as intrinsically linked.”
3. Sustained commitment is critical to achieving impact
Addressing complex social challenges does not happen overnight or on quarterly cycles. Deeply entrenched social challenges like the racial wealth gap, climate change, and persistent health inequities are the result of a very long history and the very real presence of systemic oppression. Driving any level of change requires sustained and trusting partnerships, deep relationships with communities, and staff who know the intricacies of the problems looking to address and what internal assets can be effectively leveraged. This requires a long-term relationship and commitment to addressing a problem.
We know this moment is forcing companies to make a lot of tough decisions about what to prioritize in the near and long-term. We encourage companies to remember that creating positive social impact is not a fad or an exercise in compliance, but an incredibly powerful opportunity to join the effort to build a society that works for all of us, build positive will with employers and customers, develop deep and lasting partnerships to improve your operating context, and contribute to the innovation needed to differentiate from peers. Companies that divest in social impact may be sacrificing long-term growth opportunities and benefits for short-term gains.