Navigating ESG Risks in Turbulent Times: CFO Insights and Strategies for Sustainable Growth

by Christopher Tower

BDO’s ESG Risk & ROI Survey indicates that CFOs are embracing ESG strategies amid economic uncertainty.

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Facing record-high inflation and an uncertain economic landscape, senior business leaders may be struggling to address stakeholder demands and expectations while driving growth. Amid these turbulent conditions, environmental, social, and governance (ESG) risks are top of mind for leaders across business sectors and regions. Talent shortages, extreme weather events — such as the historic heatwave this July, the challenges of energy transition, and geopolitical disruptions can impede businesses’ efforts to build sustainable resilience.

In BDO’s recent ESG Risk & ROI Survey, more than 600 CFOs shared how they are evaluating and addressing these concerns. Respondents made it clear that ESG issues like human capital management remain on their radars as financial material challenges, but these risks also offer opportunities.

The Materiality of ESG Risks 

Letting ESG risks go unaddressed can be dangerous. They can affect access to capital, alienate stakeholders, and potentially erode customer trust. Most CFOs surveyed view ESG risk mitigation through the lens of compliance, likely with an eye toward the SEC’s upcoming Scope 1, 2, and 3 greenhouse gas (GHG) reporting standards. The SEC is expected to finalize its new standards this year, which as currently proposed would require significantly enhanced climate-related disclosures in registration statements and annual reports. While implementing the necessary controls and processes over data collection and reporting processes may prove costly, delays may increase those costs and spark stakeholder scrutiny while exposing the business to regulatory risks. 

Recognizing this, some proactive finance leaders are treating environmental and social risk management as far more than a compliance exercise. Retail CFOs reported facing heightened stakeholder scrutiny around fair labor practices and supply chain sustainability, and they are taking note. Their exposure and proximity to the consumer make addressing these issues a business imperative. In healthcare, where CFOs were most likely to classify their ESG programs as mature and engrained in their business models, there is growing recognition of the impact that social determinants of health can have on consumers’ health outcomes. These finance leaders, like their retail counterparts, acknowledge that they must proactively integrate that reality into their growth strategies — including by building services that increase equitable access to healthcare. 

Whether they’re driven by compliance, stakeholder pressures, or a combination of the two, finance leaders acknowledge that many ESG risks are already material. Roughly two-thirds of CFOs surveyed said they believe ESG concerns like natural disasters, data privacy breaches, and public health threats pose at least some risk to their business in 2023. Those challenges can just as easily give way to opportunities if businesses work to reflect these new factors in growth strategies.

ESG Initiatives as a Growth Driver 

To address myriad human capital, geopolitical, cyber, and climate risks, finance leaders are adopting targeted ESG strategies. Their endeavors are bearing fruit.

Just as inaction toward ESG risks can harm stakeholder relationships, proactivity can enhance them. Retail, life sciences, and technology CFOs said their ESG initiatives have improved ratings. Their peers in manufacturing, healthcare, and energy reported that ESG programs have bolstered their recruiting and retention efforts — no small benefit in a challenging and somewhat disengaged talent market.

The passage of the Inflation Reduction Act (IRA) in August 2022 created significant financial incentives for sustainable initiatives. In the bill, the Biden administration committed to allocating $369 billion to energy security and clean energy programs over the next decade, including programs to incentivize domestic production of clean energy and electric vehicles. Notably, the IRA offers renewable energy tax credits and permits businesses to transfer them, empowering organizations of all industries to participate in and benefit from the clean energy transition.

A good sign: CFOs overwhelmingly reported their intent to capitalize on these IRA provisions. Eighty-nine percent said they already or plan to take advantage of clean energy initiatives and funding and are engaging in tax scenario planning. Additionally, 86% intend to revisit decarbonization plans. These tax advantages are unprecedented, and finance leaders rightly see them as lucrative opportunities.

Finally, in perhaps the biggest endorsement of ESG risk management, 80% of those surveyed plan to maintain or increase their ESG investments even if macroeconomic conditions worsen. That’s because integrating ESG initiatives into growth strategies can help business leaders ensure they make the most of every investment in sustainability and maximize the value of related incentives.

Gaining an Edge 

For many organizations, ESG risks can pose formidable roadblocks to sustainable growth and value creation. As respondents in the ESG Risk & ROI Survey demonstrate, the benefits of proactivity far exceed mere compliance. Developing an ESG strategy that aligns with growth strategy, stakeholder concerns, and regulatory mandates can help organizations build sustainable operations and longer-term resilience.

Christopher Tower is Managing Partner, Sustainability & ESG at BDO USA