As far back as the early 1900s, special laws and government agencies were beginning to pop up across the world to deal with environmental issues. There was a surge of awareness in the 1980s when global warming became an international political agenda. The UN has held conferences bringing key issues to the forefront, and annual “Earth Day” has attracted millions of supporters to the cause.
How humans both affect and are affected by their environment has been important since day one. Perhaps our potential to improve our actions and their repercussions drives the desire for the kind of change that will safeguard the future of our planet and humankind.
Today, environmental and social issues are a regular part of mainstream consciousness and are continuously gaining support. ‘Hybrid’, ‘upcycling’ and ‘diversity’ are a part of everyday vernacular and global culture has begun to expect environmental and social concern from everyone. When a company involves itself in its sustainability practices and social responsibilities, it becomes part of a greater purpose, connecting to millions around the world. Customers and partners hugely appreciate this social consciousness and it bodes well for a company’s future.
Environment, Social and Governance (ESG) remained unregulated in the United States until recently. The shifting regulatory landscape has driven new ESG initiatives and proposals which aim to create greater accountability and consistency across reporting frameworks and compliance requirements. The EU has been quicker to adopt many prudent directives which are shaping how they do business.
What is ESG?
ESG is made up of 3 components:
E is for Environmental. As mentioned above, this is probably the most well known part of the ESG. This can include carbon footprinting, energy sources, recycling, hazardous emissions or waste disposal, just to name a few topics.
S is for Social. What could possibly match the importance of protecting our planet but protecting the people that live on it. Social issues covered by ESG include diversity, gender equality, mental health, forced labor, healthy working conditions, and parental leave, amongst others.
G is for Governance. How a company governs their business has a great impact on its overall ethics and investability. Diversity in the boardroom, corruption and bribery, tax strategy, protecting shareholder interests and disclosing information on these topics all feature under Governance in ESG.
Don’t be fooled by its simplicity- it’s value is greater than the sum of its parts. Not practicing ESG can threaten the stability of a company and if not practiced properly, can be seen as a sign of unethical or corrupt behavior. Overall, ESG gives all those with interest in the company visibility into non-financial matters that are relevant to value and performance.
ESG Risk Management
ESG sounds broad in terms of what it could cover yet it is a niche component of risk management. Just like every other realm of risk management, a healthy approach and appropriate tools will streamline the process and you’ll see that ESG assurance is far less overwhelming than you’d think. ESG risk management is critical in order to identify, manage and mitigate all the risks involved. Look out for ESG software that can automate some of the processes involved in assessing your company or your clients for their level of ESG practice.
There is no one unified approach to ESG risk assessment. Global regulators are yet to create one standard to cover all jurisdictions or unify all elements of ESG. Data collection and analysis should help a company define ESG and which specific risks they may be exposed to. Completing a comprehensive risk assessment, as you would for any type of risk, is critical in order to examine the business processes and see how they align with ESG goals.
Use the outcomes of an ESG risk assessment to integrate ESG risks into your business strategy. Consider how these risks will translate into controls and governance practices. Integrate key issues into awareness training, company policies and mission statements to boost company culture, drive attitudes and actions that align to these values.
Tip: Using readily available ESG software on a Cyber Risk Management Platform will allow you to embed ESG into your regular risk assessment and map controls across frameworks.
ESG and Investment Firms
We’ve established that ESG is critical for a company’s reputation and market success. Running a business with a social conscience has become key for investment firms. The transition towards sustainability and equity has become an integral consideration for investors who need to identify the long term risks and impacts, and maximize sustainability, with regards to a company’s ESG practices.
The demand for socially responsible investment is on the rise. Sustainable investment wants to create value for both society and investors, and is currently showcasing huge growth. CNBC quotes Morningstar who report that U.S. sustainable funds saw $15.7 billion in net inflows during the third quarter of 2021 with assets in these funds totalling more than $330 billion as of September.
ESG indexes are designed to help investors rate potential investments and incorporate ESG factors into their decision making processes. ESG risks can have financial implications but these aren’t necessarily reflected in traditional financial reviews. An ESG rating will measure a company’s exposure to long-term ESG risks and how well they manage them. MCSI, for example, who have been rating ESG since 1990, use a rules-based methodology to rate companies (and countries, mutual funds and ETFs!) against the key ESG issues, from Leader (AAA) to Laggard (CCC).
The average PE portfolio company assesses multiple potential investments and needs to deploy the right ESG risk assessment tool to achieve the most accurate data in the most efficient way.
Using an ESG risk management framework will ensure investors include all of the necessary parameters in their risk analysis to gain visibility into a company’s ESG compliance.
A great ESG risk analysis tool should save you time and resources, provide quantifiable metrics and generate reports that provide valuable insights to support and drive smart decision making.
Contact Centraleyes today to see for yourself how we can automate your ESG risk management and save you hundreds of hours managing and assessing your client portfolios.