What is ESG risk management? Why is it so important for organizations?
In today’s world, sustainable development is a necessity, not just a trendy concept. ESG risk management is a comprehensive strategy that impacts not only environmental, social, and organizational aspects, but also financial results. What is ESG and why is it important?
In recent years, businesses have had to face quite unpredictable events, such as the pandemic, geopolitical conflicts, and climate-related issues. As a result, the concept of ESG has gained importance, becoming a way to increase an organization’s resilience, but not only that. Proactive actions in the area of ESG build a positive image, facilitate investments, and help organizations stay up to date with international regulatory requirements and ESG-related news. Thus, corporate responsibility and social goals have become key elements of an integrated business strategy.
What is ESG?
ESG is a strategic approach that relates to areas connected to a company’s sustainable development. From mitigating environmental impact, through relationships with society, promoting sustainable development, to ensuring responsible governance—today’s businesses face the inevitable need to integrate ESG criteria into their daily operations. So, what exactly is ESG?
ESG is an acronym derived from the following English words:
- Environmental – environmental risks related to how the company interacts with the environment.
- Social – social risks related to the company’s relationships with society, local communities, and employees.
- Governance – also known as corporate governance; risks related to management, referring to how the company is run and operated.
Integrating these aspects can bring benefits not only to the company itself but also to its partners, investors, and the environment. It is important to view these from two perspectives: the impact of the business on the environment (inside-out) and the impact of external factors on the business (outside-in). It should also be noted that ESG is not a “trend” but a reflection of changes and market expectations, as well as increasingly restrictive regulations.
What is ESG risk management?
Generally speaking, the goal of ESG risk management is to support sustainable development. It helps build long-term resilience for the organization through integrated management of ESG factors. This is important because, while companies are increasingly using non-financial aspects in their analytical processes to identify risks and opportunities for expansion, they still do not include ESG indicators in their annual reports or sustainability reports. This is set to change.
In recent years, many important regulations have emerged regarding ESG, which encompasses environmental, social, and governance issues. One of the key regulations is the CSRD (Corporate Sustainability Reporting Directive) from December 14, 2022, also known as the Directive on Corporate Sustainability Reporting, and the ESRS (European Sustainability Reporting Standards) regulation from July 31, 2023, which functions as a Delegated Regulation of the European Commission concerning sustainability reporting standards. This is not the end—work is ongoing on further regulations focusing on ESG reporting, including the forecasting of risks and their prevention.
Many organizations are working on creating standards that would facilitate the integration of ESG factors into the investment and management process. Notable examples include the Sustainability Accounting Standards Board (SASB), the Global Reporting Initiative (GRI), and the Task Force on Climate-related Financial Disclosures (TCFD).
What are ESG risks?
The term ESG risks refers to a broad spectrum of potential threats that, if not properly managed, can have a negative impact on a company’s profitability, reputation, and sustainability. On the other hand, these risks also represent a combination of opportunities that can have a significant (and positive) effect on financial performance.
These include risks arising from environmental factors (such as waste reduction and recycling, protection of marine resources), social factors (including integration, equality and equal pay, employee development and training, data protection), and governance issues, all of which the company must address and manage.
Why is ESG risk management important?
ESG has gained significance because stakeholders are increasingly considering non-financial factors when making investment decisions. ESG criteria help assess the overall sustainability and ethical performance of companies, which can impact their long-term success and reputation.
Remember: Regardless of size or industry, every organization must address ESG-related issues, as some of them can have a detrimental effect on financial performance and/or reputation. Companies that prioritize ESG gain an advantage in building trust, increasing competitiveness, and attracting investors.
There are already examples in the market where companies faced millions, even billions, of dollars in financial losses due to poor ESG practices (or the lack thereof). A notable example is Volkswagen—millions of vehicles were recalled as a result of poor management after the company admitted to falsifying emission tests. The fines, penalties, financial settlements, and buyback costs cost VW $35 billion. Another example is Pacific Gas & Electric, which paid over $55 million to avoid criminal prosecution related to two large fires caused by old power lines in Northern California. Financial losses also affected Apple and Hyundai Motors in response to human rights violations.
These examples may seem distant as they involve giants, but this does not mean that smaller companies are exempt. Every business is exposed to negative scenarios and “missteps” related to ESG. These can significantly harm profitability and even affect the survival of the company.
It’s worth noting that the cost of adapting to ESG and mitigating its impacts is relatively modest compared to what a company could face in the future. Therefore, organizations must constantly identify and mitigate risks that threaten their continuity. How to do this? By leveraging the support of experts who specialize in risk management on a daily basis—such as PBSG.
Leverage the support of ESG experts
For years, we have been working with private and public organizations, large and small companies. We focus on the flexibility of our services, which is why we always tailor them to the industry, specifics, and scale of operations. Furthermore, we continuously update our offerings, adapting them to legal regulations and those related to ESG. This is especially important as these regulations are becoming increasingly stringent. Companies that implement ESG rules sooner are more likely to quickly and efficiently adapt to new regulations.
Implementing an ESG strategy brings benefits such as a strong reputation, employee loyalty, and a positive image in the eyes of investors and partners. By entrusting this task to us, you can be confident that professionals will handle it, helping to minimize costs associated with risk occurrence and adapting to future requirements.
Check out our offer on: risk management.