ESG Spending: Friend Or Foe In The Modern Age?

Key takeaways

• A recent series of surveys have highlighted mixed approaches and values placed on ESG spending and investing
• 91% of U.S.-based CEOs believe we’ll see a recession in the next year, with 59% planning to pause or reconsider ESG spending
• Only 25% of North American business leaders believe that prioritizing ESG strategies will be “extremely important” in 10 years
• Meanwhile, 85% of global asset-owning fiduciaries see ESG investments as “very” or “fairly” material (financially relevant)

A recent series of surveys have highlighted mixed (and occasionally surprising) attitudes and intentions regarding ESG spending and investing.

For starters, a survey of 400 American CEOs found that 91% predict a recession in the next year. And though the majority of these consider ESG integral to long-term success, 59% see ESG taking a backburner thanks to soaring inflation and a shrinking economy.

Meanwhile, a study from the U.K. finds that only 25% of North American business leaders think that prioritizing ESG strategies will become “extremely important” by 2032, compared to over 55% in Europe.

And a recent Morningstar survey indicates that most pensions, sovereign wealth funds and insurers consider ESG issues financially relevant to investing.

The mixed opinions between large companies and asset holders suggests that ESG issues will continue to take center stage in the coming decade.

That spells big news for businesses and governments – and even bigger news for investors who stand to profit (or not).

Long- and short-term financial outlooks: a mixed bag

A new survey from KPMG, a global professional services firm, finds that 91% of U.S.-based CEOs are already preparing for a recession in the next 12 months. While 80% believe it could impact three-year growth, just 34% believe it will be “mild and short.”

Many fear that economic shrinkage could stunt the record earnings and growth seen post-pandemic. To counteract a potential recession, over 75% have begun making plans. 51% are contemplating workforce downsizing (read: layoffs), though 71% are concerned about keeping necessary talent.

Already, a plethora of large firms, including Alphabet and Meta, have frozen new hires. Big Tech has also seen an uptick in mass layoffs, with Netflix
NFLX
, Peloton and Tesla among the worst offenders.

Still, over 90% of U.S. CEOs project that their workforces will still grow in a three-year term. Nearly as many – 8 in 10 – are confident that the domestic economy and their own companies will remain resilient for months to come. And 52% anticipate that their earnings will rise at least 2.5% over 36 months.

These mingled views on recession and resilience aren’t entirely surprising, given that the U.S. has managed to stave off anything larger than a technical recession in the face of sky-high inflation and soaring interest rates.

However, data from the Bureau of Economic Analysis suggests that Americans have burned nearly 30% of their savings post-pandemic. Lower reserves could increase recessionary risks as consumer spending power drops.

KPMG U.S. CEO Paul Knopp said in a statement, “CEOs are walking a tightrope as they consider a wide range of actions – including workforce reductions – to prepare for a potential recession while still managing through the pandemic, dealing with supply chain and technology disruption…and finding ways to drive growth.”

And as GDP growth continues to decline, U.S. CEOs now consider “inflation-proofing” their capital a top priority. For many, that lays ESG spending on the chopping block.

ESG spending cuts on the table

As many large companies prepare to relinquish their hard-won talent, they’re also considering their ESG budgets. According to the KPMG study, nearly 60% of large American firms are preparing to pause or reconsider ESG spending to offset recessionary impacts.

However, the prospects isn’t one to be considered lightly.

70% of CEOs also acknowledge that ESG spending improves financial performance and is integral to their company’s long-term success. And 28% believe letting down their stakeholders regarding ESG spending could lead to difficulties accessing capital amid tightening credit conditions.

But facing potential economic decline, the struggle has becoming balancing shrinking profits with long-term stability and values.

KPMG’s U.S. ESG Leader, Rob Fisher, calls this balancing act “a classic moment of prioritizing short-term and long-term returns.” He also notes that CEOs have to decide whether their priority will be “next quarter’s results, or recognize that in the future there is only going to be one kind of economy – a low-carbon economy.”

The investment decisions they make now, he adds, will determine their ability to compete and thrive during the global transition.

KPMG Deputy Chair and COO Laura Newinski agrees. “In this season of change, with the prospect of a recession casting a shadow, CEOs continue to show a commitment to transformational growth,” she said. “As the pandemic has shown us, the opportunity that disruption brings to transform business models and develop a future-ready foundation is unlike any other.”

ESG spending globally: attitudes, struggles and regulations

The KPMG survey canvassed 400 American CEOs whose companies generate at least $500 million in revenue annually. The data came from a large set of 1,325 business leaders polled across 11 markets between July and August.

Globally, economic pessimism was slightly lower, just 86% of leaders expecting a recession and 58% believing it could be short and mild. Despite 45% believing that ESG programs improve performance, around a third have already paused or reevaluated their ESG efforts. Just under half have also considered downsizing their workforce.

Another ESG survey of 250 C-suite executives finds that 98% of global business leaders cite ESG as essential to business success.

But in North America, a mere 25% of business leaders believe prioritizing ESG spending will be “extremely important” by 2032. That compares to 58% in Europe and 71% in the Asia-Pacific region.

Meanwhile, just 37% of North American C-suites believe their corporate greenhouse emissions will decline in ten years compared to 88% and 81% in Asia-Pacific and Europe. And though 64% of non-American leaders expect ESG spending to increase in 10 years, 61% expect environmental spending will remain the same or decrease.

The report contemplates that this “enthusiasm gap” means a majority of North American business leaders are out of step with their global counterparts. Some discrepancies are also likely arise due to generational differences, as 60% of those under 50 think ESG spending will become “extremely important.”

Cory Gunderson, the executive vice president of Global Solutions for Protiviti – the company that ran the study – sees ESG spending remaining a top priority for most large global firms in the near future. “However,” he added,” many organizations – especially those in North America – appear to be in more of a ‘wait and see’ mode and may not be on track compared to their global peers.”

Are investors and regulators out on ESG spending, too?

There’s some evidence that active investors have also begun souring on ESG for their own reasons.

A recent survey of 1,800 customers from London-based Capital.com found that 52% have “never” traded on ESG factors. While a similar number said they weren’t sure how, around 12% claimed that ESG investments are “too expensive.”

However, a new wave of global regulations aims to mandate ESG spending and make ESG investing cheaper and easier. In the European Union, investors and corporations face strict regulations regarding environmental sustainability requirements.

In the U.S., the SEC has proposed similarly strict climate disclosure requirements. However, a group of traditionally conservative states have pushed back in an attempt to disentangle ESG initiatives from finance in a bid to protect non-ESG assets like oil.

What investment firms say about ESG investments

Another survey commissioned by Morningstar Indexes and Morningstar Sustainalytics finds that ESG investing appears differently from the top-down. This survey consulted 500 individuals and asset-owning fiduciaries including pensions, wealth funds and insurers who command $32.7 trillion in assets globally.

Morningstar found that a large majority – 85% – see ESG factors as “very” or “fairly” material to the investment process. (Material in this case means financially relevant.) About 80% described ESG as essential across asset classes like stocks, bonds and real estate, while 70% believe ESG has risen in importance over the past five years.

That said, less than 30% reported that ESG factors are considered for over half their organization’s total AUM, suggesting that implementation is catching on slowly. This could be due to concerns about issues like “greenwashing,” focusing on profits rather than creating real solutions or being seen as practicing “woke capitalism.”

Still, there’s hope for ESG spending and investing overall. Some 65% reported a noticeable improvement in the quality of ESG data that companies report. And while it’s not 100%, most respondents found that ESG metrics have become “a core element of investing, rather than a specialist niche.”

How does ESG spending impact everyday investors?

ESG spending and investments have been growing more prevalent worldwide as more countries and businesses consider fighting climate change a worthwhile cause. But for complicated regulatory and financial reasons, it appears that efforts could be stalled in the United States and beyond amid a potential recession.

Still, for ESG investors who want to invest with their values, dozens of funds and companies cater to these efforts.

Q.ai doesn’t have one of these funds – yet. However, we do offer several Investment Kits that look to the future, including a few that provide access to environmental, social or governance components.

For example, with our Clean Tech Kit, investors can put their money into companies that actively innovate for the future, including solar power, electric vehicles and more.

We also offer an Infrastructure Kit to capitalize on large-scale infrastructure spending. While it’s not an ESG investment in and of itself, this fund invests in the backbone of our nation, which is increasingly moving toward greener, cleaner water, energy and buildings.

Download Q.ai today for access to AI-powered investment strategies. When you deposit $100, we’ll add an additional $50 to your account.