Last updated on Dec 19, 2023
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- Sustainability
- Corporate Sustainability
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Regulatory risk
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Financial risk
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Operational risk
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Reputation risk
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Innovation risk
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Here’s what else to consider
Environmental, social and governance (ESG) practices are becoming increasingly important for businesses, investors and consumers. ESG refers to the criteria that measure how a company performs on issues such as climate change, human rights, diversity, ethics and transparency. Ignoring ESG practices can expose businesses to various risks that can harm their reputation, profitability and sustainability. In this article, we will explore some of these risks and how to avoid them.
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- Carlos Ainsa Abatte CEO, Regional Director, Operations Business Innovation Sustainable Manager | Healthcare Vertical, Retail, Transport…
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- Georges Bock Founder and CEO at Moniflo
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1 Regulatory risk
One of the risks of ignoring ESG practices is facing stricter regulations and penalties from governments and authorities. Many countries and regions are implementing policies and laws that require businesses to disclose and reduce their environmental and social impacts, such as carbon emissions, waste management, labor standards and human rights. Failing to comply with these regulations can result in fines, sanctions, lawsuits and loss of licenses. To avoid this risk, businesses should monitor and align their ESG practices with the relevant legal frameworks and standards in their markets.
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- Georges Bock Founder and CEO at Moniflo
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Esma statistics show that sustainable UCITs are constantly better performing than their peers. So what is the risk in not considering ESG and impact aspects?As an investor you make less money! As simple as this.
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- Nawar Alsaadi, FSA, SIPC Sustainable Investing Evangelist | You Can't Afford Not To Follow!
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Real ESG risks are not regulatory risks, they are business risks. A business that doesn't manage its resource consumption efficiently, it's human capital properly, it's customers responsibly, and doesn't have a transparent and accountable governance won't only fail from an ESG perspective, but will likely fail as a competitive and a viable business.
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Sustainability and ESG considerations are rewiring the business world. One aspect of ESG is the concept of "internalizing externalities" via regulatory. Examples could include1. Carbon pricing: increase in costs to corporates2. Permitting delays: lower revenue growth 3. Fines: increase in costs Over the longer term, the competitive landscape in each industry could shift. Leaders on financially material Sustainability issues could emerge stronger
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2 Financial risk
Another risk of ignoring ESG practices is losing access to capital and funding from investors and lenders. ESG factors are increasingly influencing the decisions of asset managers, pension funds, banks and other financial institutions that provide capital to businesses. These stakeholders are looking for companies that demonstrate strong ESG performance and mitigate their ESG risks. They are also avoiding companies that have poor ESG records or are involved in controversies or scandals. To avoid this risk, businesses should communicate and report their ESG achievements and goals to their investors and lenders, and seek opportunities to improve their ESG ratings and scores.
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- Ghassan Zeidan, FRM, SCR, MBA Delivering Excellence in Risk Management, ESG, and Internal Audit as Founder @ Paragon Consulting Partners | LinkedIn Top Voice
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Failure to incorporate ESG risks into frameworks and practices can lead to financial risk in a variety of ways. Financial risk (Credit risk, liquidity risk, market risk) impacts can come from loss of assets, impacts to supply chain, damage in infrastructure, social pressures, green washing leading to fines, sudden surge in commodity prices due to unavailability etc. There are many examples.
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On one hand there are trillions pledged by investors towards sustainable companies and on the other hand all investors are scared of issues arising out of non compliance leading to losses and law suits. So it’s a double whammy when it comes to financial risks. Not only will u face fines but u will lose share holder value and even stand the chance of losing vendors and customers. So the financial risk is not only in terms of fines and penalties but an overarching Damascus sword.
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3 Operational risk
A third risk of ignoring ESG practices is facing disruptions and inefficiencies in their operations and supply chains. ESG issues can affect the availability and quality of the resources, materials and services that businesses need to run their activities. For example, climate change can cause extreme weather events, water scarcity, biodiversity loss and land degradation that can disrupt the production and distribution of goods and services. Social issues can cause labor disputes, strikes, protests and human rights violations that can affect the workforce and the communities where businesses operate. To avoid this risk, businesses should adopt ESG practices that enhance their resilience and efficiency, such as reducing their environmental footprint, optimizing their resource use, ensuring fair and safe working conditions, and engaging with their stakeholders.
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- Carlos Ainsa Abatte CEO, Regional Director, Operations Business Innovation Sustainable Manager | Healthcare Vertical, Retail, Transport and Logistics | Industrial Engineer U. de Chile, MBA Executive UAI, Master's Sustainable Innovation UDD
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A company in the manufacturing industry can reduce its operating costs and dependence on suppliers by adopting energy-efficient technologies and optimizing its production processes to use fewer inputs and materials. This increased efficiency can make the company less vulnerable to price volatility, while also helping it comply with environmental regulations and avoid fines. Efficient resource management can strengthen the company's operational resilience and reduce the risk of disruptions.
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- Ghassan Zeidan, FRM, SCR, MBA Delivering Excellence in Risk Management, ESG, and Internal Audit as Founder @ Paragon Consulting Partners | LinkedIn Top Voice
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Operational risk resulting from ignoring ESG practices can be significant. Physical risks will can result in property damage, business interruption, supply chain issues etc. Transition risk can lead to people risk whereby climate transition can result in in adequately trained staff. Also, transition can lead to stranded assets which no longer have any value.
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- Monaem Ben Lellahom Group CEO Sustainable Square Consultancy. ESG Technology. Decarbonization. Climate Change. ESG. Sustainable Finance. Responsible Investment. Social Impact
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Ignoring ESG practices in business is like ignoring the warning lights on your car's dashboard :) It can lead to operational hiccups and breakdowns in your supply chain. Think of climate change causing unexpected storms or droughts, disrupting how and where you get your materials. Or social issues sparking labor disputes and community unrest, like a roadblock in your daily operations. To avoid these bumps in the road, it's smart to adopt ESG practices that make your business more robust and efficient. I believe by doing so, you're not just fixing potential problems before they arise; you're also building a smoother, more sustainable path for your business's journey.
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4 Reputation risk
A fourth risk of ignoring ESG practices is damaging their reputation and brand value among their customers and the public. ESG issues are becoming more visible and relevant for consumers, who are increasingly demanding products and services that are ethical, sustainable and socially responsible. Consumers are also more aware and vocal about the ESG performance and impact of the companies they buy from, and are willing to switch to or boycott those that do not meet their expectations. To avoid this risk, businesses should align their ESG practices with their brand identity and values, and communicate them clearly and authentically to their customers and the public.
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- Ghassan Zeidan, FRM, SCR, MBA Delivering Excellence in Risk Management, ESG, and Internal Audit as Founder @ Paragon Consulting Partners | LinkedIn Top Voice
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Reputational risk here results from social, industry and potentially regulatory action as a consequence of not embracing ESG initiatives or practices, but more likely as a result of making false promises and misrepresenting claims at best or being deceitful at worst.
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I have noticed that those who don't want to spend time tackling ESG and environmental sustainability assessments and certifications start losing new RFPs.And, at customer renewal time, these ESG questions are beginning to pop up. So, they are risking losing existing clients as well by not having data and policies to share regarding emissions, carbon, environmental issues, diversity, human rights, and governance.
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5 Innovation risk
A fifth risk of ignoring ESG practices is missing out on the opportunities and benefits of innovation and growth. ESG issues are creating new challenges and needs for businesses and society, but also new solutions and markets. Businesses that ignore ESG practices may fail to anticipate and respond to these changes, and lose their competitive edge and market share. Businesses that embrace ESG practices may gain a competitive advantage and create value by developing and offering products and services that address the environmental and social problems and demands of their customers and stakeholders. To avoid this risk, businesses should foster a culture of innovation and creativity that integrates ESG considerations and opportunities into their strategies and processes.
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- Carlos Ainsa Abatte CEO, Regional Director, Operations Business Innovation Sustainable Manager | Healthcare Vertical, Retail, Transport and Logistics | Industrial Engineer U. de Chile, MBA Executive UAI, Master's Sustainable Innovation UDD
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Integrating innovation methodologies with ESG opens doors to new market opportunities focused on users and communities that enable the company's long-term growth and sustainability.
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- Monaem Ben Lellahom Group CEO Sustainable Square Consultancy. ESG Technology. Decarbonization. Climate Change. ESG. Sustainable Finance. Responsible Investment. Social Impact
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Ignoring ESG practices can make businesses miss out on innovation and growth opportunities. As ESG issues create new market needs, companies overlooking these aspects risk losing their competitive edge. Embracing ESG, however, can lead to innovative products and services that meet evolving environmental and social demands. To stay ahead, businesses should integrate ESG into their strategies, turning challenges into opportunities for growth and leadership in an increasingly conscientious market.
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6 Here’s what else to consider
This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?
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A company ignoring ESG practices can loose access to capital, cost of capital will increase and also impact the market, going further. Implementation of CBAM and many large corporates taking scope 3, value chain emission reduction measures, human rights due diligence and other environmental, social assessments and certification will only increase the greenium further. A company with market /sector leading ESG practices and ratings will be able to a command premium.
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- Manuela Ramirez Financing the energy transition
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The most dangerous risk of ignoring ESG is that with a weak Governance there is no risk management in the company. The G in ESG is the base that allows a company to ensure E and S risk management, and even more so Financial Risk and other strategic concerns. If you analyse all environmental, social and financial scandals they have a common root: something went wrong on the G.
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- Divakar Singh Consultant • Sustainability • IITH • Carbon Management • Carbon offset
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Ignoring Environmental, Social, and Governance (ESG) practices can pose various risks. Environmentally, neglecting sustainability may lead to environmental degradation, regulatory fines, and increased operational costs. Socially, poor treatment of employees or communities can harm a company's reputation, leading to customer and investor distrust. Governance lapses may result in legal issues, financial mismanagement, and diminished shareholder value. Embracing ESG practices is increasingly important for long-term resilience and positive stakeholder relationships.
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