ESG risk management: Why it’s business-critical

Alexandria Claypole Date published: Mar 31, 21 Last updated: Nov 10, 21

In the wake of the coronavirus pandemic and the growing global urgency around climate change, organizations worldwide will be forced to place an even greater focus on their ESG risk management practices.

Historically, corporate social responsibility (CSR) was the initiative frequently championed by activist employees and consumers, whereby issues such as carbon footprints and ethical supply chains were scrutinised. Yet for most organizations, this wasn’t considered a core business objective – nor was it officially regulated.

Fast forward to today and it is now ESG that is the hot topic in boardrooms, whilst becoming an increasing requirement for investors, employees and customers alike. As perceptions have changed over time, these stakeholders have come to realise that environmental, social and governance issues are critical to a business’s reputation and financial performance.

We explore what this means for risk managers, and the benefits of organizations prioritizing their ESG risks to improve their sustainability in the long-term.

So, what should risk managers be aware of?

With an ever-growing emphasis on ESG and a wide gamut of risks to manage, many risk professionals are having to adjust their strategies accordingly to ensure that environmental, social and governance standards are fully integrated into the organization’s ERM.

Collaboration with key stakeholders will also be essential in helping risk managers to mitigate ESG risks and put forth a strong disclosure strategy. By applying traditional risk fundamentals to ESG risk management, such as putting appropriate controls in place and ensuring accuracy and transparency in all communications, companies will be in a better position to act on their values, respond quickly to threats and prepare for upcoming regulatory intervention.

Organizations who do this will also stand a far better chance of increasing their ESG ratings, which provide a means of measurement for investors requesting insight into a company’s sustainability credentials. Broadly speaking, the higher the ESG metrics score, the more likely a business can withstand long-term risk, embrace innovation and take a forward-looking approach to value creation.

What are the benefits of having a strong ESG proposition and managing ESG risks?

There are a wealth of business benefits to placing greater focus on ESG risk management and building it into the wider risk framework. The top advantages include: 

Enhanced sustainability

With a clearer view of ESG risks, businesses can better allocate their resources, combat rising operating expenses, improve their employee retention and remain compliant with regulations. These combined can help to create greater efficiencies and cost savings in the long-term, whilst providing a stronger foundation of resilience in the face of future uncertainty. Sustainability is also achieved by recognising opportunity, as those businesses who are forward-looking when it comes to ESG risks often gain the upper hand in a competitive market.

More proactive regulatory compliance

As the demands from stakeholders increase for organizations to be accountable and transparent throughout all business activity, so too do the industry regulations surrounding ESG. Businesses will be expected to report on all ESG issues, therefore if ESG risk management is incorporated as a major part of the ERM strategy, disclosing this information to the relevant governing bodies should be much more straightforward, helping to reduce legal intervention.

Increased profitability

It goes without saying that if a business is responsive to mitigating risks that might otherwise impact its bottom line or reputation, then it is in a much better position of being profitable. ESG-conscious organizations are more likely to be considered a safer investment by those exploring sustainable funds. They are also attractive to consumers and top talent, who are becoming increasingly more clued up about the goods and services they buy, and who they work for. This leads to stronger top-line growth and the ability to tap into new markets or expand into existing ones.

More enticing to investors

Further to the previous point, socially conscious investors are now keen to incorporate ESG values such as responding to climate change into their portfolios, in line with the more traditional factors of risk and profitability. The organizations that manage their ESG risks well will be the ones more likely to attract top investors. Not only is ESG investing gaining traction due to generating competitive returns but it also helps investors to feel good about the stocks that they own. Even amid the pandemic, European sustainable funds continued to rise over €20billion in 2020. 

Greater employee productivity

We’ve already mentioned an ESG focus as being a cornerstone to attracting and retaining talented employees, yet it can also enhance employee motivation and productivity by instilling a sense of purpose. A commitment to ESG is often seen as an organization ‘giving back’, which is met with enthusiasm by many employees. Plus, many aspects of ESG risk management directly impacts employee welfare, such as health and safety, working hours and diversity and inclusion – all of which, if done well, can improve the employee experience and lead to greater output.

Organizations must continually work hard to preserve and enhance their reputations with multiple stakeholders across a broad range of issues. ESG issues are no exception, and businesses must be alert to every shift and change in the ESG landscape and the associated risks if they are to maintain a competitive advantage.

Business intelligence tools are crucial to achieving this level of agility, where robust data analytics can enable organisations to weight specific risks and respond appropriately to movements in the environmental, social and governance domain.

Discover how Ideagen Risk Management can automate your ESG risk management practices, whilst helping to improve business resilience and performance. Also, learn how the Civil Aviation Authority (CAA) is using the solution to get more value from its risk data.