By John Piatek

Environmental, social, and governance (ESG) priorities are, by their nature, both ambitious and transformative. But pivoting any corporation to interface more thoughtfully and harmoniously with the environment and society was never going to be easy. Even in economic boom cycles, it was going to require leaders to step up and help chart a safe course through skepticism and opportunism.

And these aren’t normal times. Recessionary pressures loom. Inflation is near record levels. Management teams have a lot on their plates. No wonder companies may be rethinking their ESG priorities and timelines.

As organizations face challenge after challenge, there is a real risk that some of the strength behind the ESG wave will dissipate. Some management teams may have to choose among battling inflation, improving supply chain resiliency, and investing in ESG. Will cost cutting win out over ESG?

Dwindling Funds

The economic challenges that accompanied the Covid-19 pandemic caught many organizations off guard. The breakdown of the just-in-time supply chain is well documented. Many companies had to spend significantly to stabilize business operations, secure sources of supply, fund at-risk suppliers, and reposition more inventory closer to demand.

Most businesses are not cash rich in these challenging times. Nearly every corporate function is seeking investment to reinvent itself for a post-Covid world. As various functions compete for investment, there is a logjam of capital funding priorities.

Further complicating these investment choices is the record inflation in the G7 economies that has confounded many leadership teams. Speculation about how long this above-normal level might last drives all investment decisions, especially medium-term investments with ROIs that may look very different with current inflation rates.

The pool of money available to fund ESG priorities has shrunk, and the success criteria they are measured against are facing substantial headwinds.

ESG Can Support Cost Reduction

Investment in ESG programs sometimes runs out of steam after the easiest-to-implement and highest-ROI actions have already been put into action, leaving the more challenging long-term actions ahead.

It doesn’t have to be this way. Sustainable supply chain practices can lead to a structural cost advantage and/or increased business revenue. ESG in many situations is margin-accretive over a long time horizon. Leaders must drop the quarter-to-quarter performance lens when comparing ESG and cost reduction.

Cut Costs Fast

The most effective way to balance operational priorities and ESG investment is to secure a stronger financial base by which to make ESG progress. One fast way to accomplish this is through selling, general, and administrative (SG&A) cost-reduction programs. Procurement teams can deploy strategic sourcing initiatives to lower costs, even when recessionary forces loom.

However, many procurement teams are understaffed or have gaps in their team’s capabilities, given the ongoing war for talent. Adding incremental internal staff may be politically challenging for organizations operating under the cloud of a recession. An even faster alternative can be for companies to turn to external partners to address the SG&A cost base. Activating this type of cost effort is strategic and methodical, rather than reactionary and clumsy with ad hoc measures.

Remote and Hybrid Work

Many firms are considering more aggressive outsourcing strategies to lower costs and manage the challenges of inflation and economic slowdown. Certainly, companies need to reexamine workflows and review business processes’ digitalization to get in front of staff costs. But it’s also an opportunity to recruit, train, and retain a more diverse and inclusive workforce.

Companies are less bound to geographical territories than ever before, with fewer barriers, lower commute times, fewer days in the office, more digital collaboration tools, and more flexible hours. The talent pool to attract and recruit candidates has become bigger, and today’s remote- and hybrid-work environment presents an opportunity to make a significant leap in diversity goals.

A Challenge, Not an Impossibility

Though the financial outlook is difficult, management teams need not jump ship on ESG goals. While the effects of inflation and the broader business slowdowns will put pressure on management teams, a robust cost-reduction program and an ESG investment agenda are not mutually exclusive. A savvy investment team can find ways to use a cost-reduction effort to catalyze ESG, even in a challenging year.

Learn how GEP can help your organization reduce costs and drive growth.

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John Piatek is a vice president at GEP for procurement and supply chain consulting.