As Environmental, Social and Governance (ESG) investing grows, consumers and investors alike look to engage with more sustainable businesses. With sustainability plans and strategies becoming a key part of an organisation’s future goals, it is important that Boards of directors be on the lookout for ESG risks.
ESG risks may vary in their components, but they share a common factor: they greatly affect a company’s profitability and sustainability in the long run.
What Are ESG Risks?
ESG risks are environmental, social, and corporate governance variables that can affect a company’s performance, finances or reputation.
As many organisations have started to make the effort to transition into sustainable business practices, ESG risks and understanding ESG risks has become more imperative.
Regardless of the industry or the size of the company, every organisation can be vulnerable to ESG risks. It is crucial that your Board has an ESG strategy to mitigate these risks, since they can cause reputational or financial harm.
Types Of ESG Risks
The types of ESG risks are categorised by environmental, social and governance factors.
Environmental risk refers to how an organisation can affect the environment, and these effects can include:
- Climate change impact
- Greenhouse gas emissions
- Water usage
- Waste prevention and recycling
- Pollution prevention control
- Impact on biodiversity and ecosystems
- Protection of marine resources
- Environmental management strategies
Companies that are energy and resource-intensive should be particularly aware of environmental risks and regulations, so that they can develop long-term, sustainable strategies.
Types of social risk may include:
- Diversity, equity, inclusion and accessibility
- Wage equality
- Working and safety conditions
- Respect for human rights
- Data privacy
- Community engagement
- Supplier/vendor labour practices
Maintaining ethical relationships with all of these stakeholders is vital to the long-term success of a company, especially if that success relies on transparency and public trust.
There is no one specific approach to good governance and good governance practices, as it can be difficult to identify how practices might affect an organisation and its performance.
Types of governance risk can include:
- ESG regulation compliance
- ESG disclosures
- Company integrity and ethics
- Anti-competitive behaviour and practices
- Transparent communications
- Board structure and diversity
- Executive compensation
- Grievance procedures
- Corruption/fraud prevention
- Tax compliance
In order to operate successfully, companies need to comply with regulations and policies specific to their industry. They must also ensure that the Board of directors plays a role in managing risks, establish effective internal controls, disclose relevant information to investors and the public, and provide guidance in order to make informed decisions and allocate resources effectively.
Why Do ESG Risks Matter?
No matter the scale or type of industry, all organisations encounter ESG issues that may lead to negative impacts on their finances, image, and productivity.
While smaller businesses are less likely to be subjected to the same level of stakeholder scrutiny as larger organisations, they’re nonetheless vulnerable to ESG risks. More importantly, without the help of major investors, smaller businesses may not be able to recover as easily as larger corporations.
ESG risks are crucial for safeguarding companies against the consequences of investment risks. Neglecting these risks may lead to loss of interest from potential investors, loss of loyal customers who are increasingly conscious of environmental and societal issues, and non-compliance with environmental regulations, resulting in financial strain on the company.
In short, if not addressed swiftly and appropriately, ESG issues can have massive impacts on not just company performance, but also company survival.
Staying vigilant about ESG risks is essential for companies to ensure their long-term sustainability and success. This vigilance also helps organisations stay on top of the ever-changing landscape of ESG disclosures and regulations, so that when new regulations are passed your company does not need to go into panic mode as they are already ahead of the game.
Managing ESG Risks
Climate change poses a significant risk to the stability of the global financial system, as well as the world itself. Consequently, better data, reporting and disclosures are being required to improve identifying and managing these risks.
ESG frameworks have been established to assist different organisations in differing industries in assessing and disclosing ESG risks. There are many types of frameworks, some of the most widely recognised being the Global Reporting Initiative (GRI), the Task Force on Climate-related Financial Disclosures (TCFD), the Sustainability Reporting Standard (SRS) and the Corporate Sustainability Reporting Directive (CSRD).
ESG frameworks assist companies in moving towards proactive risk reduction strategies, and away from compliance-driven perspectives.
Effective management of ESG risks leads to increased stability and enhances investor trust and transparency. This, in turn, allows companies to access credit and debt markets, build positive brand recognition, reinvest in their operations, and achieve sustainable, long-term growth.
ESG data, data gathering and reporting is critical in helping companies engage in proper risk mitigation. It allows organisations to plan for compliance, improve disclosures and create ESG strategies to preemptively address issues.
How Convene Can Help
At Convene, our ESG expertise has helped us develop our new reporting tool Convene ESG, to help streamline your ESG report building process.
Our end-to-end approach simplifies and automates much of the process, and will help your organisation not only generate a report, but be able set up and track your ESG goals.
Our peer comparison feature also allows you to see which disclosure items your peers have reported on, as well as the best-practice recommendations for your industry.
With Convene ESG, you can be sure that your ESG data gathering and report building runs smoothly, so you can instead focus on developing your environmental practices.