A vast majority of CEOs believe we're headed toward a recession and are cutting staff, sustainability efforts and diversity budgets to prepare for a downturn.

Some 91% of U.S. CEOs are "convinced" a recession is on its way in the next 12 months, according to a KPMG survey of 1,325 CEOs between July 12 and August 24, 2022. And the top ways they're preparing for a downturn are to pause or reconsider efforts around ESG — or environmental, social and governance (59%) — and downsize their employee base (51%).

Both strategies could spell trouble for long-term success, says Paul Knopp, U.S. chair and CEO at the professional services firm KPMG.

For one, executives can't respond to a recession they did in 2020 by conducting mass layoffs and expecting consumer demand to stay depressed. What's more, cuts to ESG initiatives that customers and employees like — ones that prioritize sustainability, diversity and social progress — could backfire in the long run.

CEOs can't respond to a recession like they did in 2020

Executives should be "very cautious" about how they approach layoffs, Knopp says, adding that today's imbalanced hiring market was made worse by how leaders responded during the early pandemic downturn.

By early 2021, "the economy bounced back incredibly fast, and those leaders that cut jobs probably regret it to some degree," he says. As hiring became more competitive, employers had to raise wages, add benefits and improve job conditions in order to get people in the door.

Other conditions are leading to shortages of workers, Knopp adds: retiring Baby Boomers, falling college enrollment, limiting immigration policies, and employees dropping out of the workforce due to long Covid, child-care needs and other reasons.

Knopp says CEOs should be strategic in their cuts and be prepared for another quick rebound by mid-2023. According to the survey, while more than half of CEOs are considering downsizing their workforce over the next six months, 92% expect their company headcount to increase in the next three years.

He expects leaders will continue to feel pressure around offering good pay, benefits and working conditions: 73% of CEOs say they're concerned about their ability to retain talent due to rising inflation and cost of living factors.

Cutting environmental, social and governance budgets could backfire

Budget cuts to ESG efforts could cause employers to fall out of favor with financiers, customers and employees in the long run, too. Executives in recent years have recognized that conducting climate-friendly and socially progressive business can be profitable: 70% of U.S. CEOs surveyed this year say ESG improves financial performance, compared to 37% last year, according to KPMG.

If leaders go off-course too much with their goals, they risk losing out on access to capital from financial stakeholders who want to see improved corporate ESG efforts, they could fall out of favor with customers who bolster profits, and they could lose a competitive hiring edge over job-seekers.

As a result, CEOs reducing spending on these efforts should consider "tapping the brakes" rather than putting it up on the chopping block, Knopp says.

"CEOs recognize they have to walk the talk" around net-zero climate commitments and improvements to their social agenda around diversity, equity and inclusion, Knopp says. "Customers are making buying decisions around those commitments" and employees "want to see us be more diverse and inclusive," he adds. "It's all about measured reduction in the short-term but commitments for the long-term."

Recession fears could worsen work burnout

Business leaders should also approach budget cuts knowing how job and financial insecurity could worsen workers' burnout.

Already, CEOs said pandemic-related fatigue is the most pressing concern for their organization today, and 76% believe they need to address burnout from fast-tracked digital transformation over the past two years before they can introduce new growth initiatives to get past the recession.

Meanwhile, some employers have cut back on employee resources that grew out of pandemic distress, like Covid sick days and parental leave. Knopp says continued cuts in these areas from a larger swath of employers would be the wrong move.

New uncertainty around a potential recession and job reductions adds another level of stress, and "people feel burned out as it is," Knopp says. With more instability on the way, "I expect employers will continue to enhance emotional and physical wellbeing programs and think about additional stresses coming into sight as we move forward."

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