Climate Action in an Economic Downturn
Wednesday was “liberation day” in the U. S. as President Trump took to the White House Rose Garden to announce tariffs on U.S. allies and competitors alike. Like clockwork, traders sold off stock in markets across the globe, and economists warned that inflation will be higher than anticipated a few months ago. The likelihood of a recession has grown.
It would be understandable for a climate concerned person to fear that economic headwinds will be yet another force that slows climate action. Indeed, it’s inevitable that this chaotic moment for markets will push executives to train their eyes on stopping financial bleeding. But that doesn’t mean that businesses will deprioritize or cancel their climate programs.
Shifting Priorities: From Marketing to Financial Motivation
Over the past few years, many firms have transitioned their environmental commitments from long-shot investments or marketing schemes to financially motivated efforts with short-term returns. The economic anxiety ahead poses a crucial test. Has understanding of sustainability’s financial opportunity grown such that companies lean into their climate work, or will executives slip into thinking that climate programs are simply too expensive? The textbook first thing that businesses do in response to economic uncertainty is to protect their balance sheet to hold onto as much money as possible for a rainy day down the road. There was a time when climate programs might have seemed like easy things to cut to save money, but that’s not how things are situated today. In the years following the COVID-19 pandemic, companies very publicly doubled down on measures aimed at addressing climate change and investors poured funds into so-called ESG funds (short for environmental, social and governance). Just as the zero interest rate era fueled bold and often nonsensical investments, so too did the trillions in ESG dollars lead companies to make aggressive environmental commitments that, in some cases, were untethered from financial reality.
The last few years have forced companies to get serious. Some have looked under the hood and determined that they, in fact, can’t meet their targets, leading them to backtrack. Others have doubled down with an understanding that sustainability programs can help the bottomline. Every company and every sector is different, but the most obvious value of sustainability initiatives in a moment of economic uncertainty is efficiency. Simply put: efficiency brings down costs—and emissions. Read more: Why Investing in Climate Action During a Recession Is a Smart Business Move
Strategic Investments and Long-Term Success
The other textbook recession advice to businesses is that well-positioned firms should look for opportunities for strategic investment. Study after study has shown that strategic investment during a recession—while some competitors are cutting wantonly—positions companies to outperform when economic conditions normalize. For forward thinking firms, climate and sustainability is an area ripe for strategic investment. Companies are increasingly facing the real costs of climate change—from facilities hit by extreme weather to supply chain disruptions—which will need to be addressed. And, while the regulatory pressures have faded in the U.S., climate rules remain significant and growing in many of the key geographies around the world, meaning that multinational companies still need to pay attention to sustainability.
If this all sounds a little too optimistic, it’s worth looking at what happened during the past two economic downturns. In 2011, as the global economy was still recovering from the Great Recession, a widely cited paper from researchers at Harvard Business School found that “high sustainability” firms financially outperformed their “low sustainability” counterparts over the previous 20 years including the recent downturn. Then in 2020, as the world recovered from the COVID-induced recession, trillions flowed into funds that claimed to prioritize ESG. Of course, there is one elephant in the room that makes circumstances slightly different in this case: the economic certainty today is entirely the result of U. S. policy. In this column, I deliberately avoided trying to parse out the specific impacts of Trump’s tariff regime. While there is some good early analysis out there already, it is too soon to tell exactly how the new taxes will reshape the global clean technology supply chain—even if we know that a reshaping is inevitable.
Amid all of this, the companies that find ways to make climate action financially advantageous may not only weather this storm but emerge positioned for long-term success in a world where both climate impacts and climate solutions continue to reshape markets.