The Great Retreat: Why Companies Are Scaling Back on Sustainability (and What They Should Do Instead)

Over the past year, we’ve seen a wave of companies quietly walking back their sustainability commitments. From HSBC reducing the weight of environmental goals in its executives’ long-term incentive plans from 25% to 20% to Shell and BP rolling back their carbon reduction targets, it’s clear that the corporate world is retreating from its once-bold promises. But why? And more importantly, what should they be doing instead? Let’s dive in.

The Backslide: What’s Happening?

First, let’s get real about what’s going on. Companies are pulling back on their sustainability goals for a few key reasons:

The Anti-ESG Movement: In the US, there’s been a growing backlash against ESG (Environmental, Social, and Governance) initiatives. Some politicians and investors are framing sustainability as a political issue rather than a business imperative. This has created a chilling effect, with trillions of dollars flowing out of ESG funds.

Unrealistic Goals: Many companies set aggressive sustainability targets without doing the hard work of figuring out how to achieve them. As one source notes, “Companies signed up for goals without doing their homework.” Now, they’re walking them back because they’re too hard- or too expensive -to hit.

The AI Energy Crunch: The rise of artificial intelligence is throwing a wrench into sustainability plans. AI requires massive amounts of energy, and tech giants like Google and Microsoft are struggling to balance their climate goals with the energy demands of their data centers. Google, for example, recently ended its carbon offset program because its AI-driven energy consumption was skyrocketing.

Why This is a Problem

Climate change isn’t going away. And consumers - especially younger ones - are paying attention. A recent McKinsey study found that 70% of consumers are willing to pay more for sustainable products. Companies that ignore this are leaving money on the table.

But it’s not just about consumer preferences. Regulation is coming. Governments around the world are starting to crack down on greenwashing and impose stricter environmental standards. Companies that don’t get ahead of this are going to find themselves playing catch-up - and paying hefty fines.

What Companies Should Do Instead

1. Rethink Boundaries.

Most companies focus on their direct emissions, but the real impact happens in their supply chains. For example, 90% of emissions in industries like fashion and agriculture come from upstream and downstream activities. If supply chains are not being addressed, sustainability is not being considered.

2. Collaborate with competitors and suppliers to drive industry-wide change.

Timberland company co-founded the Leather Working Group with Nike and Adidas to improve the environmental performance of leather tanneries. By working together, they achieved results no single company could have on its own.

3. Rebalance investments.

Sustainability isn’t just a cost - it’s an investment. And like any investment, it requires a long-term perspective. Set an internal carbon price to fund emissions reduction initiatives. Companies like Danone and Klarna are already doing this, with carbon prices ranging from €35 to $200 per metric ton.

Actionable Tip: Adjust financial models to account for the growing importance of intangible assets like brand reputation. McKinsey research shows that 90% of public equity value is tied to intangibles. If sustainability efforts boost their brand, that’s a win for their bottom line.

4. Reshape Governance.

Sustainability can’t be everyone’s job - it needs dedicated leadership. Companies like Puma have embedded sustainability into their governance structures, with 5% of executive bonuses tied to sustainability goals. Puma has reduced its carbon emissions by nearly one-third while doubling revenues over the past seven years.

Actionable Tip: Create a dedicated sustainability committee at the board level and tie executive compensation to sustainability metrics. This sends a clear message that sustainability is a priority.

The Bigger Picture: A Call for Systemic Change

Here’s the hard truth: voluntary corporate sustainability initiatives can only go so far. Without systemic changes - like carbon pricing and stricter regulations - companies will continue to face misaligned incentives that prioritise short-term profits over long-term sustainability.

But that doesn’t mean companies are off the hook. In fact, they have a huge role to play in driving systemic change. Advocate for policies that “lift the industry floor” and withdraw support from trade associations that lobby against climate action. Companies like Apple and Exelon have already done this, exiting the US Chamber of Commerce over disagreements on climate policy.

Final Thoughts: The Time for Action is Now

As many corporate commitments to sustainability have become more muted, the need to decarbonise, address plastic pollution, preserve biodiversity, and address inequality has become more urgent. The hard truth is that if negative externalities like carbon emissions remain untaxed and the use of nature is not properly priced, system incentives will continue to press companies to optimise profit over the planet.

Clearheaded acknowledgment of this reality is essential. Companies must recognise that voluntary sustainability efforts have limits and that systemic change requires advocacy for legislation that "lifts the industry floor." By rethinking boundaries, rebalancing investment, and reshaping governance, companies can deliver meaningful results for both investors and the environment.

The time for half-measures and greenwashing is over. The future belongs to companies that embrace sustainability not as a burden, but as an opportunity for innovation, leadership, and long-term success.