ESG Risk Management

ESG stands for Environmental, Social, and Governance. These are the issues that businesses today are taking a stand on, and they’re a lot more complicated than a simple acronym might suggest.

Prioritizing ESG compliance in the midst of other corporate responsibilities is a challenge, but the companies that can achieve a positive ESG stance have a firm grasp on the risks facing their organizations and earn all the benefits of doing so. It’s essentially an indicator of a business’s performance and objectives that goes beyond monetary metrics.

What Does ESG Cover?

ESG risks can be broad and varied. Having to list every single responsibility would be impractical for this article, so we can give a few examples to gain an understanding of what to expect.

• Environmental: Recycling, emissions, use of resources, waste disposal.
• Social: Labor rights, parental leave, staff health initiatives.
• Governance: Integrity of operations, shareholder rights, financial reporting responsibilities.

You might be a business owner looking to assess your own firm’s ESG compliance, or you might be an investor wanting to assess the ESG postures of your potential investment firms. Either way, the key to understanding a company’s ESG situation and finding ways to improve it is to gather data on internal processes and third-party relationships.

Who Should Be Interested in ESG Adherence?

ESG matters to the stakeholders of the company. These groups want to have an accurate picture of how the business handles its ESG responsibilities so that they can align their interactions accordingly.

• Customers
• Employees
• Investors
• Business partners
• Government regulators

Investors always ask about the ESG risk mitigation efforts of their investment companies. This way, they can ensure that their choices align with their own values. A positive ESG posture also helps protect that investment.

Governments are also becoming increasingly more interested in ESG frameworks and standards, with the EU already mandating transparency from businesses in this regard. The ESG Disclosure Simplification Act is currently in progress within the U.S. government as well to codify public ESG disclosure for businesses.

The Purpose of an ESG Risk Analysis

ESG is ultimately a form of risk management, which means part of the job is assessing a company, monitoring its ESG metrics, addressing its problems, and reporting on your findings.

Start by identifying the specific risks associated with a particular industry or company. Examples here include:

• Regulatory risks like emissions reporting requirements, permits, and exposure to lawsuits.
• Technological risks arising from a failure to adopt newer, more efficient technologies and tools.
• Market risks such as changing prices of raw materials or new competition entering the industry.
• Public opinion potentially changes for the worse as consumer preferences evolve.

From there, start searching for opportunities to respond to those risks. Build up on the examples listed above:

• Switching to more efficient energy sources, recycling more, and streamlining operations cuts down on your carbon footprint and keeps you more compliant with environmental regulations.
• Responding to changing market demands by developing new products, services, and business models that better serve the modern industry.
• Expanding your supplier base and accessing new markets to diversify the organization and become more resilient to potential supply chain problems.

Thanks to your efforts in ESG compliance, you or your investment properties can enjoy lower expenses, fewer run-ins with the law, better productivity, and a stronger bottom line.

Specific Examples of ESG Risks Wreaking Havoc

While the cost of monitoring and maintaining environmental, social, and governance compliance seems high for now, keep in mind that leaving these risks unchecked can result in severe consequences like in the instances below.

• BP’s Deepwater Horizon oil spill disaster in 2010 ultimately cost the company at least $65 billion, with charges still being made almost a decade later.
• Flint, Michigan’s water crisis ended up costing the state $600 million in total, even though a proper ESG risk analysis and remediation procedures would’ve only been $80 a day according to sources.
• Volkswagen was caught hiding the amount of toxic diesel emissions from its vehicles in 2015, resulting in a charge of 31.3 billion euros.

Don’t end up like these businesses or their investors. Make ESG compliance a priority today to ensure that you only work with the firms that match up with your values.