Is your company caught in the ESG bind? Are you struggling to implement ESG at the cost of eroding margins, which are already razor-thin in a competitive environment? Are you forced into ESG without a proper understanding of the underlying risks? You are not alone.

What is ESG?

First things first. What exactly is ESG?

ESG stands for Environmental, Social, and Governance. It concerns the impact of enterprise actions on the environment, society, and governance. Relegated to the corporate backwater not too long ago, it has now assumed centerstage. 

Environmental focuses on the impact of the company’s operations on the natural environment. It involves carbon emissions, resource usage, waste management, pollution, and so on. For instance, investments in renewable energy reduce the company’s carbon footprint. 

Social considers the company’s relationships with employees, customers, suppliers, communities, and other stakeholders. It looks into diversity and inclusion, customer satisfaction, community engagement, and so on.

Governance pertains to the internal management of the company. It deals with internal controls, executive compensation, transparency, accountability, and ethical behaviour. Proper checks and balances ensure policy adherence, pre-empting internal issues. 

Why has ESG become important in the corporate landscape? 

It is no longer business as usual in the post-pandemic world. Climate change, income inequality, geopolitical tensions, and more disrupt the status quo. The uncertainties affect the environment, society and economies. Stakeholders expect companies that have the resources that individuals don’t have to invest in ESG. 

Enterprises have another big and direct reason to take ESG seriously. Investors note ESG risks in company portfolios. They use it to assess the company’s long-term, sustainability and ethical impact.  About 90% of global institutional investors revise investments if companies do not consider ESG. Blackrock, for instance, announced plans to exit investments with high sustainability risk. This could mean reducing investments in companies using coal-sourced energy. 

Consumers have also started to prefer sustainable products in increasing numbers. Revenue from sustainable products is growing 6x the rate of other products. Almost half of all customers now pay a higher price for products with a positive social and environmental impact.

These developments force businesses to devote more time, money and resources to improve ESG metrics. 

What are the ESG risks?

The positivity associated with ESG notwithstanding, many businesses remain susceptible to ESG-related risks.

The risk of business competitiveness

Too much focus on ECG can erode growth, profits, and competitiveness. For all the talk of investors and customers preferring to put their money in ESG-compliant companies, at the end of the day, ESG increases costs. It forces companies to price their products higher, with the risk of competitors who do not value ESG offering the same products at a lesser price. Some customers pay more for ESG. But in a tough business environment, most customers may still regard price as the primary consideration. 

Even companies that embrace ESG assume more risks than normal. ECG denotes a shift from financial shareholder supremacy to stakeholder capitalism. But even here, making trade-offs is difficult. For instance, energy companies face a trade-off between tackling climate change and meeting the needs of over one billion people who do not have access to reliable and affordable energy.

Overcome such risks by:

• Striking the right balance between price, shareholder value creation and sustainability. 
• Integrating ESG considerations into core business strategy. Ensure it aligns with the company’s vision and long-term goals. For instance, the company can decide to invest in energy-efficient technologies. Or they can make supply chain changes to source sustainable, eco-friendly raw materials.
• Reviewing ESG goals and tempering the same to suit changing business conditions.
• Defining systems that sustain sustainability. For instance, develop frameworks and metrics that co-opt ESG considerations when evaluating performance.
• Defining specific roles and responsibilities for specific ESG initiatives. 

Regulatory risks 

ECG parameters vary across sectors and geographies. Also, ESG regulations are inconsistent across and even within countries in many jurisdictions. Legislation and regulatory ambiguities force enterprises to walk a tightrope.

UK and Europe have many ESG-related legislations such as Sustainable Finance Disclosure Regulations (SFDR) and Corporate Sustainability Reporting Directive (CSDR). But several US states have actually enacted anti-ESG legislation, creating a bind for companies. Proponents of anti-ESG laws equate ESG mandates with the imposition of ideology over businesses. They claim ESG mandates use economic power to implement business standards beyond those required by law.

Many investors consider factors such as greenhouse gas emissions when making investment decisions. These criteria go beyond traditional fiduciary criteria and have become controversial. Many US states restrict investment funds from considering such non-pecuniary factors. Complicating matters, some other states take the opposite approach, such as setting net zero carbon targets.

Even with no such regulatory hurdles, collecting ESG data is time- and resource-intensive. 

The lack of comprehensive global baselines to enforce standardisation makes reporting difficult. 

As possible solutions, 

• Co-opt ESG factors into their risk management exercise. Identify potential ESG non-compliance or violations and the potential implications.
• Engage with stakeholders, including employees, customers, investors, communities, and regulators on ESG issues. Engaging stakeholders also demonstrates a commitment to responsible practices and building trust. 
• Establish robust governance and leadership to deliver transparency, accountability, and ethical behaviour. 

Reputational risks

In business, perception matters the most. Companies not only have to commit to ESG initiatives but also have to showcase their commitment.

The threat of hit jobs by competitors, disgruntled employees or others impacts perception. Such hit jobs may highlight the company’s ESG failures, lack of diversity, or undesirable business practices. These stories may circulate globally, while the company’s response may not receive the same traction. 

To sustain the company’s ESG reputation,

• Offer comprehensive ESG reporting that showcases the company’s efforts and results. Transparent reporting builds credibility with stakeholders.
• Develop a sustainability culture. Some basic elements include printing less, carpooling, using eco-friendly packaging, and more. It involves developing mindsets that connect to a collective purpose beyond profit.

Proper audits and measurements mitigate most ESG risks. In companies with a developed ESG landscape, risk identification becomes easier. But pricing the risks is still challenging. The easy way to identify and price ESG risks is to partner with experts such as Intra Links, who have established their credibility over time. IntraLinks helps you with robust ESG analysis to identify and close gaps and unearth opportunities. IntraLinks’s expertise in multiple geographies and sectors makes it the ideal partner for executing ESG initiatives in time-pressured investment scenarios.