It is critical for companies to align ESG with already established risk management practices. ESG is not only about managing companies’ impact outwards (e.g, positive or negative impact created throughout value chain activities), but also about impact inwards – how can internal and external environmental, social and governance issues affect business value and continuity?
ESG risks may fall under various categories. Environmental risks include extreme weather events like flooding, extreme rainfall, drought, storm, and increasing temperatures, which may impact the company’s physical assets, workability, and supply chains, causing revenue loss, CAPEX investment requirements, and disruptions in supply chains.
Social risks include increasingly severe population shifts and migration, causing disruptions in industries, changing socioeconomic dynamics in countries, and creating unfair advantages in some cases. It also encompasses factors like inability to find highly competent talent, failure to develop talent, and increasing discrepancy between the skills that are sought by employers and the skills that are possessed by individuals.
Governance risks include failure to integrate ESG factors into governance mechanisms and organs (e.g, diversity in the boardroom, diversity in committees, executive compensation), increasing cyber vulnerabilities, compliance issues, and poor ethics management.
All these risks may all have detrimental effects on business performance, value, and continuity.
Failing to ensure a sustainable supply chain, not meeting regulatory requirements, experiencing higher taxes, and a ton of reputational damage caused by lacking precautions in employee health and safety, operations of a company’s suppliers and/or customers, non-compliance with environmental laws and regulations, ecosystem damages from operations, poor management practices, lack of transparency on competitive behavior etc.
Publicly declaring ESG targets, reporting current and potential positive and negative impacts, sharing progress towards goals, and transparently sharing potential risks and mitigation methods is critical, as ESG risks have a direct impact on business operations.
ESG risks are business risks. Companies should meticulously analyze and proactively plan their actions to manage these risks. They should determine environmental and social performance indicators to keep track of their performance and their standing within their ESG targets.