What is ESG Risk?
ESG risk refers to the potential negative impacts on a company’s performance and reputation arising from environmental, social, and governance factors. It encompasses a wide range of risks associated with issues such as climate change, resource depletion, labor practices, diversity and inclusion, data security, and ethical conduct.
ESG risk analysis evaluates how these factors can affect a company’s financial stability, operational efficiency, brand value, and stakeholder trust. By identifying and mitigating ESG risks, organizations can enhance their resilience, minimize potential disruptions, and capitalize on opportunities for sustainable growth. Effectively managing ESG risk is crucial for maintaining long-term viability, attracting investors, and meeting the evolving expectations of customers, employees, and regulators.
What are the requirements for ESG?
Exact requirements vary according to the agency providing the standard, the relevant industry, and even the size of the company looking to comply. Examples of common requirements include:
|Corporate Climate Policies||Labor Standards||Processes|
|Energy Use||Workplace Safety||Policies|
|Waste / Hazardous Waste||Human Rights||Anti Bribery and Corruption|
|Pollution||Community Relations||Executive Compensation|
|Natural Resource Conservation||Gender and Diversity||Whistleblower Schemes|
|Treatment of Animals||Data Protection and Privacy||Transparency|
|Preservation of Natural Habitats||Product Safety||Business Continuity Management Planning|
|Greenhouse Gas Emissions|
Businesses that place a high priority on sustainability as well as individuals seeking for socially conscious investment opportunities should pay attention to ESG issues.
There are a number of ESG frameworks a company can choose to align with and our assessment incorporates aspects of each.
The Global Reporting Initiative (GRI) – The GRI standards are guidelines that assist with understanding, developing and communicating sustainability metrics. The framework can be downloaded from their website for free. GRI is an international and independent body and relies on voluntary disclosure, in the form of a report.
The Sustainability Accounting Standards Board (SASB) – The SASB is a non-profit organization who have developed a global standard to enable you to identify, manage, communicate and report financial ESG sustainability to investors, in language that investors understand. Their “Materiality Map” identifies the financially material issues and explains the standards, via 77 industry-specific metrics. Because SASB is very specific, it works well alongside another framework, like GRI.
International Integrated Reporting Council (IIRC) – The IIRC is a reporting standard, often used together with SASB. Its reporting framework can be used to report on ESG and was designed to drive sustainable development.
The UN Global Compact: Ten Principles – The UN Global Compact is a voluntary initiative launched by the United Nations to encourage businesses and organizations to adopt sustainable and socially responsible policies and practices. It provides a framework for companies to align their operations and strategies with ten universally accepted principles in the areas of human rights, labor, environment, and anti-corruption. The principles are derived from various UN declarations and conventions.
The Workforce Disclosure Initiative (WDI) – This is created to help companies better communicate labor practices to stakeholders in an efficient way. WDI is starting to accept applications whereby companies can submit their ESG reports.
The Task Force on Climate-Related Financial Disclosures (TCFD) – A group of non-profit organizations got together to form a task force that sets out to help organizations integrate information related to climate change in their financial reporting. It’s used across 32 countries by 374 companies.
The Future of ESG Reporting
In September 2020, five leading framework and standard-setting organizations—CDP, CDSB, GRI, IIRC and SASB—announced a shared vision for a comprehensive corporate reporting system that includes both financial accounting and sustainability disclosure, connected via integrated reporting.
Why should you assess ESG Risk?
Besides actively contributing to preserving the environment for future generations, ESG compliance testifies to a company’s values and is emerging as a factor for long-term financial growth.
Identifying ESG risks is crucial. By focusing on identifying ESG risks, companies go beyond compliance and navigate the complex landscape of ESG challenges more effectively.
Firstly, it enables proactive risk management by assessing and addressing potential challenges before they escalate, mitigating negative impacts on performance and reputation.
Secondly, it helps build and maintain trust with stakeholders, including customers, employees, and investors, by demonstrating a commitment to responsible practices and enhancing brand value.
Additionally, effective management of ESG risks contributes to long-term sustainability, identifying opportunities for innovation, cost savings, and operational efficiencies while minimizing disruptions from emerging environmental, social, and governance challenges.
Furthermore, it ensures regulatory compliance and reduces legal risks by staying ahead of evolving requirements.
Lastly, aligning with investor expectations by identifying and addressing ESG risks can attract capital from socially responsible investment funds and stakeholders who prioritize sustainable practices.
How to Achieve Compliance?
A full Centraleyes ESG Risk assessment of your environment, including processes and systems, is a comprehensive foundation and necessary precursor to remediating any issues and improving your ESG stance.
Centraleyes ESG Risk assessment links to an ESG-specific automated risk register that automatically creates a set of globally relevant, cross-industry primary risks and generates both an inherent and a residual risk score. The tool’s advanced Financial Impact calculator walks you through a primary loss calculation under 6 elements of loss, automatically tagging the risk with a
financial attribute. For efficient remediation, prioritize risks according to impact and likelihood. Group risks with customized tagging and assign tasks and responsibilities across the organization.
The Centraleyes ESG assessment is built to assess universal ESG areas applicable across industries. It allows companies to identify the issues relevant to them, determine their position for each, and generate an ESG report showing the company’s ESG posture. The Centraleyes platform uses cutting edge automation to empower clients with remediation steps and allows them to easily and visibly analyze posture, make future plans and business decisions based on the outcomes.
Centraleyes is an automated ESG Risk solution with pre-loaded frameworks to guide you through a comprehensive risk assessment and towards optimal ESG posture. Onboard in minutes and use our platform to assess, remediate and report, all powered by Centraleyes automation.
Learn More: ESG Risk Management: How to Conduct Risk Assessments, Analyze and Prioritize
Why Board Members Should care about ESG Compliance Software