While many organizations are on track to address specific climate related financial risks, very few have a comprehensive view of their overall ESG performance.
To do this, you’ll need to establish benchmarks and thresholds for all ESG metrics, whether that’s reducing greenhouse gas (GHG) emissions, improving DEI, or reducing your water impacts.
By setting standards and identifying outliers across your entire ESG program, you can establish an ESG risk profile that will help to mitigate potential impacts on your business including financial, reputation-related and physical costs.
what is ESG risk management?
Traditionally, risk management programs have addressed financial or operational risk. Today, however, businesses face new issues in the form of environmental, social, and governance related issues.
For many businesses, the most familiar of these is climate risk management. As we explore in our blog Climate Risk: What It Means for Your Business, this involves assessing the potential physical impacts of climate change on your organization and the various costs involved in the transition to a lower carbon or circular economy.
ESG comprises more than climate accounting, however, so you’ll also need to address the social responsibility element of your ESG program, whether that’s diversity, equity and inclusion (DEI) or your ethical supply chain, and assess your governance as it relates to those environmental and social factors.
By establishing thresholds and benchmarks for each metric within your ESG program, you can create an early warning system for any that are at risk of compromising your ESG-related goals, commitments, or KPIs so you can bring those initiatives back on track.
If you’re unsure of the benefits of evaluating your risk profile, here are three significant ways ESG risks can impact your business.
1. financial implications
There are multiple potential financial implications for organizations that do not proactively manage their ESG risk. Without proper strategies in place, it’s easy to miss key indicators that your ESG performance is not aligning with your goals.
As a result, poor ESG performance can impact:
- Profitability – A McKinsey study found that companies with the most ethnically/culturally diverse boards worldwide are more likely to experience higher profits.
- Ability to Secure Capital and Retain Investors – A 2021 study by the Morgan Stanley Institute for Sustainable Investing found that 79% of US investors and 99% of millennials are interested in sustainable investing.
Stock Price – A study published in The International Journal of Environmental Research and Public Health showed that the stock price volatility of companies with good ESG performance is lower than that of companies with poor performance.
In the worst case scenario, there could even be lawsuits, fines, or sanctions for non-compliance. According to a Bank of America analysis, ESG-related controversies cost large US companies more than $500 billion in a five year span.
To avoid the costs associated with these potential outcomes, ESG risk management provides valuable insight into any ESG metrics at risk of failing to meet compliance with local and federal regulations, as well as those that may be out of alignment with investor or board requirements.
2. brand reputation
In the event that you are subject to the legal repercussions of environmental non-compliance, you can be sure that your brand will suffer.
Your stakeholders will be understandably wary of this kind of outcome, which is why, increasingly, investors expect companies to disclose their ESG progress and pitfalls. As more stakeholders value ESG disclosure, your reputation is at stake if you choose to do nothing or to misrepresent your actions with green or purpose-washing.
In fact, a survey by Weber Shandwick found that global executives assign 63% of their company’s market value to their overall reputation and 91% of them report that their company’s reputation is essential to their board of directors. It is therefore vital to manage your organization’s public ESG commitments and your progress towards reaching them.
ESG risk management helps protect your reputation by monitoring ESG data for any potential issues such as ethical concerns with suppliers, exceeding water and air pollution thresholds, or operating in a manner that negatively impacts the local community or ecosystem – all of which could seriously damage your brand reputation.
3. physical risk
Environmental risks are set to have a huge impact on business in the coming years. Climate-related weather events, for example, are expected to cost businesses $1.3 trillion by 2026 according to a study by the CDP.
The same research also expects that suppliers will report $1.26 trillion in costs due to environmental risks such as climate change, deforestation, and water insecurity. And in the next five years, it reveals corporate buyers could face $120 billion in increased costs due to environmental supply chain risks.
To alleviate these potential issues, ESG risk management helps you assess your current physical assets and better inform where you should invest in new ones. This could include identifying locations with increased risk of flooding or forest fires, or highlighting areas where human rights and labor regulations need to be closely monitored.
By increasing scrutiny around these risks your organization can minimize or avoid potential future costs relating to physical assets.
need help managing your ESG risk?
The AMCS Sustainability Platform helps your organization monitor operational data, utilizing machine learning to produce an accurate ESG risk profile.
With information to determine your organizational risk and evaluate your next steps, you’re all set to avoid ESG pitfalls, boost performance, and increase your profitability.
Find out how by speaking with an AMCS expert or arrange a demo to discover how your business could benefit.