By John Piatek
Environmental, social, and governance (ESG) priorities are, by their very nature, ambitious and transformative. But pivoting any corporation to interface more consciously and harmoniously with the environment and society is never easy. Even in economic growth cycles, leaders must step in and help plot a safe path through uncertainty and opportunism.
And these are not normal times. Recessionary pressures are emerging. Inflation is near record levels. Management teams have a lot on their plates. It’s no surprise that 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 be lost. Some management teams may have to choose between fighting inflation, improving supply chain resilience, and ESG investing. Will cost cutting win out over ESG?
Shrinking Funds
The economic challenges accompanying the Covid-19 pandemic have scared many organizations. The breakdown of the just-in-time supply chain is well documented. Many companies need to spend heavily to strengthen business operations, secure sources of supply, finance risky suppliers, and reposition large amounts of inventory closer to demand.
Most businesses are not cash-rich in these challenging times. Almost every corporate activity is looking for investment to transform itself for a post-Covid world. As different functions compete for investment, there is a logjam in capital funding priorities.
Further complicating these investment options is the record inflation in the G7 economies that has baffled many leadership teams. Speculation about how long these above-normal levels may last is driving all investment decisions, especially medium-term investments with ROIs that may look very different today. inflation rates.
The pool of money available to fund ESG priorities has shrunk, and the benchmarks for success they measure face significant challenges.
ESG Can Support Cost Reduction
Investment in ESG programs sometimes dries up after the easiest to implement and highest ROI actions have been taken, leaving more challenging long-term actions ahead.
It doesn’t have to be this way. Sustainable supply chain practices can lead to a cost advantage in the structure and/or increase in business profits. ESG in many situations is margin-accretive in the long run. Leaders must drop the quarter-to-quarter performance lens when comparing ESG and cost reduction.
Cutting Costs Fast
The most effective way to balance ESG operational and investment priorities is to ensure a stronger financial base on which to make ESG progress. One quick way to do this is through selling, general, and administrative (SG&A) cost reduction programs. Procurement teams can deploy strategic sourcing initiatives to reduce costs, even as recession forces.
However, many procurement teams are understaffed or have gaps in their team capabilities, due to the ongoing war for talent. Adding incremental internal staff can be politically challenging for organizations operating under the cloud of a recession. A faster alternative may be for companies to turn to external partners to meet 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 companies are considering more aggressive outsourcing strategies to lower costs and manage the challenges of inflation and economic slowdown. In fact, companies need to re-evaluate workflows and review the digitalization of business processes to reduce staff costs. But it’s also an opportunity to recruit, train, and retain a more diverse and inclusive workforce.
Companies are less bound by geographic territories than ever before, with fewer barriers, shorter commute times, fewer days in the office, more digital collaboration tools, and more flexibility. that time. The talent pool to attract and recruit candidates has become larger, and the remote- and hybrid-work environment now presents an opportunity to make a significant leap in diversity goals.
A Challenge, Not an Impossibility
Even if the financial perspective is difficult, management teams should not jump to ESG goals. While the effects of inflation and the broader business slowdown 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 cost-reduction efforts to catalyze ESG, even in a challenging year.
Find out how GEP can help your organization reduce costs and drive growth.
John Piatek is GEP’s vice president for procurement and supply chain consulting.
