As costs continue to rise, corporations are left wondering how they can balance their profits and environmental contributions.
Investing in social responsibility and sustainability is typically good for business, but increased expenses may make it challenging. What does inflation mean for ESG-themed targets?
How does inflation connect to ESG goals?
Inflation has many causes — effects from the COVID-19 pandemic and the ongoing crisis in Ukraine have contributed significantly to recent increases. Certain regulations contribute as well. For example, the government passed the Inflation Reduction Act of 2022 to combat inflation and address climate change, using a $669 billion total investment planned over the next decade.
Investment implications of the act are significant, considering it affects consumers and businesses by encouraging people to purchase energy-efficient products, supporting clean manufacturing and increasing corporate taxes. Since these actions impact inflation and the environment, they connect to environmental, social and corporate governance (ESG) targets.
In response to the IRA, the European Commission published its long-awaited Net Zero Industry Act in March, which aims to boost Europe’s green industry and ensure heavily subsidised US-made imports do not begin undercutting EU-made technologies.
How does rising inflation impact ESG-themed targets?
While many organizations only consider the return on investment (ROI) of their ESG targets, they must look at the bigger picture. Each letter of the acronym has a separate relation to rising inflation.
Rising inflation affects each part of ESG-themed targets differently:
● Environmental: As inflation increases, so does the cost of raw materials or energy production. While businesses need to monitor their impact on the environment to achieve their ESG targets, it can become expensive.
● Social: Social factors include wages, reputation and impact on society. Inflation connects to how businesses pay or charge people.
● Corporate Governance: The idea of corporate governance is that an organization’s structure, processes or policies should positively impact the environment or society. Inflation affects it because ESG-related decisions can lead to higher costs or reduced returns.
While the connection between inflation and ESG-themed targets mainly comes from changes in energy or material prices, the long-term effects may relate to the social factor more. Much of the rise in costs comes from global events, so it eventually will steady. Meanwhile, consumers, investors and employees will always be a part of doing business.
How to achieve ESG-themed targets despite inflation
Is it possible to achieve ESG targets despite rising inflation? While corporations may not see as much profit at first, it may pay off in the long term.
1. Shift to alternative business models
While inflation won’t continue to rise forever, there’s no telling when it will slow. Since certain industries are impacted more than others, shifting to alternative business models may result in more success. For example, cooperatives can create more jobs, ensure equal wealth distribution and re-invest most revenue since they’re not-for-profit. It focuses on the social part of ESG goals because those who own and run a co-op also directly benefit from their services.
2. Prioritize what is possible
Many corporations are shifting focus toward economic growth with little care for their impact on society. For example, air pollution from electricity production, fossil fuel use and various industries causes seven million deaths annually.
Even if increased costs make achieving the original ESG-themed targets challenging, organizations can prioritize what’s possible. For example, if larger wages are too expensive, they can focus on hiring for diversity and accessibility.
While many corporations focus on ROI and grow concerned about rising costs, a solid commitment to ESG-themed targets results in higher equity returns and reduced risk for financial losses.
3. Incentivize stakeholders
Consumers, employees and investors are essential for the success of ESG goals during inflation. Organizations can encourage them to remain loyal and make purchases to help balance the effects of increased costs. It can be as simple as raising wages.
Employees have continuously become more efficient over the years. For example, workers’ productivity grew nearly 60% in 40 years while their pay only increased by about 16%. Retaining employees can be challenging when costs rise, so it can help to give them a reason to stay.
4. Reconsider investments
Organizations can reconsider where they put their money to see success with their ESG goals. For example, investments focused on value, momentum and quality usually perform better than style investing when inflation rises. If they pay attention to the shift in markets and adapt, they can take advantage of changes.
Are organizations responsible for increased costs?
Keeping up with ESG-themed targets despite rising inflation can mean less buying power, increased labor costs and more expensive borrowing. Although profit margins may be slimmer, improved brand reputation and employee retention can increase savings. While expenses are generally going up, corporations may not have to be responsible for paying them.
Paying extra for sustainability and social responsibility may not seem worth it, but consumers typically pay more to environmentally conscious companies. For example, 60% of buyers are willing to pay more for products in sustainable packaging. They likely won’t want to see significant price hikes during an inflationary economy, but they’ll be fine paying extra.
Rising inflation and ESG-themed targets
Although rising inflation typically means organizations must take on more costs, there are ways to offset them to maintain their ESG-themed targets. While more expensive materials or labor may make achieving goals more challenging, they’re still valuable and attainable objectives.
Jane Marsh works as an environmental writer, covering topics such as sustainability and green living. She is also the founder of Environment.co
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