Execs aren't convinced ESG investments deliver profits. The skepticism might undercut sustainability budgets.

• More than 90% of executives said ESG spending delivered returns within a few years in a new survey.
• But companies remain more motivated by how ESG can improve their reputations than their profits.
• The skepticism and possible recession could undercut ESG spending in 2023.

This article is part of Insider's weekly newsletter on sustainability, written by Catherine Boudreau, senior sustainability reporter.

A possible recession and high inflation don't bode well for corporate investment in environmental, social, and governance initiatives in the new year — especially because many executives aren't convinced such efforts are linked to higher profits.

Companies are slightly more motivated by how sustainability can improve their reputations than their bottom lines, found a July-to-September online survey of more than 2,500 leaders involved in ESG efforts at large companies across the US, Europe, Australia, New Zealand, India, and China.

You can't blame some of the execs for being skeptical. The explosive growth in ESG spending has created a lot of confusion about its influence on corporate performance and investor returns, and research examining the trend has found mixed results.

In the US, ESG investing is under attack by Republican officials, and regulators are amping up scrutiny, muddying the waters.

The ESG survey commissioned by Infosys, a global IT consulting and outsourcing firm based in India, found that there was concern about budgets, the timeline for a return on investment, and whether there would be a payoff at all.

All this uncertainty explains why companies are more focused on ways ESG can enhance how customers and investors perceive them, Jasmeet Singh, executive vice president and global head of manufacturing at Infosys, said in an email. The benefits for a brand are the clearest path to a return on investment, Singh said.

But, he said, companies that see ESG efforts only as good public relations risk overlooking more-tangible benefits.

"Early initiatives — reducing energy and water usage, more efficient use of materials — provide measurable financial benefits in the form of savings," Singh said. "Some firms are able to parlay a commitment to ESG into new markets and business models, although that's rare."

Still, more than 90% of executives surveyed said ESG spending delivered "moderate" to "significant" returns within a few years. None reported losses. Further analysis by Infosys found that a 10-percentage-point increase in ESG spending correlated with a profit growth of 1 percentage point.

Singh added that many companies still didn't perceive ESG as a "value creator."

Budget increases for ESG work are unlikely because of the economic uncertainty and high inflation; spending in these areas could be on the chopping block. In a mid-2022 KPMG survey of more than 1,300 CEOs around the world, 59% said they planned to "pause or reconsider" their ESG efforts within six months.

Even so, there are changes a company can make that don't cost any money but deliver returns, Singh said. Governance had one of the strongest correlations with profit growth.

Installing chief sustainability and diversity officers, putting an ESG committee at the board level, and allowing chief sustainability officers to sign off on funding for new projects all lead to better financial outcomes, the Infosys study found. But only about one-quarter of those surveyed said their company had all those elements in place, and 71% said there were no plans to hire a chief sustainability officer.

Embedding those roles at the senior-executive level ensures they have the authority to accomplish ESG goals, Singh said.