In the past 18 months, many companies have initiated a sobering retreat from their prior commitments to sustainability, related to both the environment and people.
In June 2024, for example, Tractor Supply Co., a $14 billion agriculture, livestock, and pet care retailer, announced that it was eliminating all jobs focused on diversity, equity, and inclusion and withdrawing its carbon-emissions goals. The company previously had targeted achieving net zero emissions in operations by 2040, as well as to increase people of color in managerial positions and above by 50%. In the same week, Canada’s six largest oilsands companies wiped their websites clean of their decarbonization goals. The month before, as part of a company-wide expense reduction, Nike laid off dozens of sustainability managers, Harvard Business Review reported.
These changes coincide with corporate backsliding on an array of sustainability targets. For example, in light of increasing oil prices both bp and Shell cut their commitments to lower carbon emissions; footwear maker Crocs reset its target for net zero carbon emissions back by a decade from 2030 to 2040; and Microsoft missed their carbon-reduction goals due to the growth of AI. Meta and Google pulled back on their DEI plans and, according to the WSJ, companies including Coca Cola and Nestle “kicked the plastic can down the road (again)” after missing virgin plastic–reduction goals.
This lapse in commitment to sustainability is shortsighted and ill advised. As social and environmental challenges escalate, so too will scrutiny and regulation. After a review of the factors responsible for the recent fade of corporate voluntary sustainability, I offer a prescription for how companies might refresh their allegiance to sustainability — notwithstanding pressure to pull back.
Why the Pull Back?
Though each company’s circumstances are unique, a common set of factors explains the recent sustainability reset. For starters, the conservative-led anti-ESG political campaign has had a chilling effect, tampering enthusiasm for DEI, corporate sustainability, and ESG investment. On top of that, the relative underperformance of ESG equity funds compared to traditional funds has led to a multi-trillion dollar shift in asset flows out of ESG funds, which has (predictably) caused companies to deemphasize ESG outcomes.
Many companies are finding that investment in sustainability is hard to justify because the benefits are often intangible and hard to value. For example, what value ought to be ascribed to avoiding reputational damage resulting from investment in supply chain compliance audits? Or how should a CFO quantify the value of avoiding a future carbon tax or the recruitment and retention benefits of a sustainable enterprise?
What’s more, many of the targets were unrealistic to begin with. As one now ex-head of sustainability told me, “Companies signed up for aggressive goals without doing their homework.” Unilever CEO Hein Schumacher recently echoed this sentiment: “When the initial targets were set we may have underestimated the scale and complexity of what it takes to make [hitting sustainability targets] happen.” Savvy to the potential of greenwashing, jurisdictions are passing laws that force companies to walk back clearly overly aggressive goals. For example, Canada just passed an amendment to its Competition Act aimed at claims and conduct pertaining to “greenwashing.” Remedies for violations can run $10 million for a first offense.
Finally, corporate leaders are learning that investments in sustainability do not always yield positive returns. For example, a private study (across 30 companies, spanning sectors) in which I participated found less than 15% of the investments in decarbonization delivered positive financial returns.
Confronted with these challenges, it is no surprise that enthusiasm for corporate sustainability has waned and companies are walking back ambitious decarbonization pledges.
What to Do
In some ways, it’s good that companies are walking back ambitious climate goals, as many were fanciful to begin with. But success will only be realized if these unrealistic sustainability targets are replaced with immediate and meaningful action. Forward-thinking companies can take several steps to deliver results for investors and the environment:
Rethink boundaries
While industries have different value chains, for most companies, the bulk of social and environmental impact occurs outside of their own four walls. Using carbon emissions as a proxy for activity and impact, approximately 90% of agricultural, mining, and fashion emissions (to use only a few high-profile examples) reside in upstream and downstream Scope 3 emissions. As such, achieving most sustainability goals depends on rethinking the contours of relationships with competitors and suppliers.
This realization led Timberland (where I served as chief operating officer) to help cofound the cross-competitor consortium, the Leather Working Group (LWG). In partnership with Nike, Clark’s, Adidas, and IKEA, Timberland established the LWG as an impartial body to develop and maintain a protocol to assess and rate the environmental performance of leather tanneries. Tanneries were rated on a scale from unrated to bronze, silver, or gold, and brands used these assessments to incentivize environmental improvement. The scale of competing brands working together engendered sustainability advances that no single brand could achieve on its own.
Another way that progressive companies can advance sustainability with suppliers is by shifting from short-term, price-focused transactions to a long-term, trust-based relationship. Shared commitments can enable suppliers to invest in machinery or new processes that engender sustainability progress. This can, over time, often also deliver lower costs or differentiation.
For example, King Arthur Baking, a Vermont-based ESOP, is working collaboratively with its milling and farmer partners to convert from conventional to regenerative agriculture (disclosure: I sit on the board of King Arthur). During the transition, King Arthur Baking is funding academic research and partnering with competitors to provide on-site support for farmers, paying a slight transition premium and committing to offtake agreements that extend over multiple seasons. This burden-sharing and commitment is aimed at providing benefits to farmers in the form of lower input costs and improved soil health, which over time will yield improved margins, more nutrient-rich wheat, and surety of supply for King Arthur. It will also lead to lower carbon emissions resulting from less tilling of the soil.
Rebalance investment
Over time, the balance of negative- and positive-return sustainability investments will shift. As the impacts of climate change become more pronounced, pricing of carbon will become even more common. Already, starting in 2026, the newly enacted European Carbon Border Adjustment Mechanism (CBAM), a tariff, will put a price on the embodied carbon for several key heavy industry inputs including steel, aluminum, iron, and cement entering the EU. As a result, many investments that may not pay out today will be accretive in the future.
To prepare for truer pricing of carbon, companies ought to set an internal carbon price with proceeds used to fund investments to lower emissions. Carbon prices are already in place in more than 20% of U.S. and EU companies. Danone, for example, started with an internal carbon price of €35 and Klarna recently doubled its price for Scope 1 and Scope 2 emissions to $200 per metric. Also, given that 90% of public equity value is comprised of intangible assets (such as a company’s brand and intellectual property), several companies adjust cash flows or the corporate hurdle rate to advantage sustainability investments. Though imprecise, so doing attempts to account for the increasingly important value of intangible assets.
Like working with suppliers, making these adjustments demands an orientation that balances short- and medium-term results. This is because these financial tactics spur companies to accelerate the costs (e.g., of regulation) and risks (e.g., to brand reputation) of environmental degradation by replacing the mispriced incentives of the market with clearer signals to advance sustainability. Courageous executives will realize, however, that so doing is in fact in keeping with how investors value companies — based on future cash flows, not each 90-day earnings cycle.