While many organizations may be on track to reduce greenhouse gas (GHG) emissions, improve DEI, or manage other ESG programs, most business leaders are left without a comprehensive view of their overall ESG performance and the potential associated risks. By establishing benchmarks and thresholds for individual ESG metrics and identifying standards and outliers across an entire ESG program, organizations can establish an ESG risk profile that will help them identify and mitigate potential impacts on key areas of their business from financial performance, to brand reputation, and physical assets.
What Is ESG Risk Management
ESG Risk Management identifies, quantifies, unifies, and mitigates organizational risks related to metrics like GHG emissions, DEI stats, and more—across your ESG program. By establishing thresholds and benchmarks for each metric, you create an early warning system for any that are at risk of not meeting your ESG-related goals, commitments, or KPIs.
ESG Risk Management allows you to identify ESG programs that are at risk so your organization can create action plans to bring those initiatives back on track.
If you’re unsure of the benefits of formulizing the way you evaluate your risk profile, here are three compelling reasons for prioritizing ESG Risk Management.
1. Financial Implications
There are multiple potential financial implications for organizations that do not proactively manage their ESG risk. Without proper ESG Risk Management strategies in place, an organization can miss key indicators their ESG performance is not aligning with goals.
Poor ESG performance can impact:
- Profitability – A McKinsey study found that companies with the most ethnically/culturally diverse boards worldwide are 43% 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 U.S. 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.
There are also other potential costs to an organization for noncompliance including lawsuits, fines, and sanctions. According to a Bank of America analysis, ESG-related controversies cost large US companies more than $500 billion in a five year span.
ESG Risk Management helps protect organizations from these potential financial implications by providing insights into which ESG metrics are at risk of not meeting compliance thresholds for local and federal regulations as well as those that may be out of alignment with investor or board requirements.
2. Brand Reputation
There is growing demand from investors and other stakeholders for companies to disclose their ESG progress and pitfalls. And as more stakeholders value organizations reporting and acting on ESG data, a brand’s reputation is at stake if they choose to do nothing or misrepresent their actions with green or purpose-washing.
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 essential for organizations to manage their public ESG commitments and their progress towards reaching them.
ESG Risk Management helps protect a brand’s reputation by monitoring ESG data streams for any potential issues that could arise, such as missing benchmarks on critical performance metrics, ethical concerns with suppliers, exceeding water and air pollution thresholds, operating in a manner that negatively impacts the local community or ecosystem, and many more.
3. Physical Risk
A study by the CDP found that climate-related weather events are expected to cost businesses $1.3 trillion by 2026 and that $1.26 trillion in total financial impact will be reported by suppliers due to environmental risks caused by climate change, deforestation, and water insecurity.
The CDP study also found that in the next five years, corporate buyers could face $120 billion in increased costs due to environmental supply chain risks.
ESG risk management helps you assess risks to your current physical assets and better inform where you should invest in new ones. This can include identifying potential locations with increased risks of flooding, forest fires, human rights and labor regulations, and more.
By monitoring and creating action plans around these ESG risks your organization can minimize or avoid potential future costs relating to physical assets.
Need help managing your ESG risk? The FigBytes Risk Solution helps your organization monitor and use operational data coupled with machine learning to produce a risk profile that helps you manage your ESG program, determine your organizational risk, and evaluate your next steps.