Companies face new risks as consumers, employees, investors, and partners demand greater corporate transparency, accountability, and sustainability. These stakeholders want to know crucial information that defines the companies’ ethics of operations, such as the treatment of employees and impact on the environment. The environmental, social, and governance variables that can impact the operating or financial performance of a business are collectively referred to as environmental, social and governance (ESG) risks.
A company or business management that overlooks these risks is likely to suffer huge financial difficulties and lose the support of stakeholders, such as investors to customers. People or businesses looking for investment opportunities or partners will only consider your company for investment if it has a high sustainability score.
Notably, ESG issues are not equal, which implies that every company should craft a unique strategy that will address its material sustainability risks. Keep reading to learn more about the specific ESG risks to focus on for your company.
Why You Need to Give Special Focus to ESG Risks
Although ESG risks exist outside the regular financial audit system, they are very important if you want your company to excel. No matter the size of the industry, every company faces a number of ESG or sustainability issues, some of which can rapidly harm the reputation of the company. For example, the Bank of America (BofA) Global Research team estimates that about USD600 billion of market cap for the leading S&P 500 companies was lost because of ESG-related controversies over the last seven years. Shifting to sustainable operations can help to create long-term value and investment opportunities for the target market.
Although small and medium enterprises or businesses might not experience the same extensive scrutiny as bigger firms, it does not mean they are not vulnerable. For example, corporate management and financial risks-related issues are common to all categories of businesses. The danger is that most medium and small enterprises and companies might not have greater resilience, and ESG risks could easily wipe them off.
If people do not find value in investing in your company, it could easily run into financial challenges down the line.
As a manager or entrepreneur make sure to understand every ESG risk facing your company and take the right approaches to sustainability. Also, ensure that the efforts adopted by the company are communicated in english or other language that stakeholders can understand well.
The Main ESG Risks
ESG risks that face companies can be broken down into three main categories; environmental, social, and governance. Let’s break them down to ensure you understand how the factors impact every opportunity for your company at the local and global level.
- Environmental Risks
Environmental risks today are the main point of focus for most consumers and investors. The risks refer to how your company affects the environment and vice versa. For example, emissions from your companies can accelerate global warming and climate change, but the phenomenon can also negatively impact the organisation. Global warming and climate change can make it challenging to get raw materials because of extended droughts. Other environmental risks include:
- Water security and usage.
- Loss of biodiversity.
- Pollution prevention and control.
- Social Risks
When reviewing a social risk for your sustainability planning, you need to appreciate that these are issues that impact people both in your organisation and away. These risks are crucial in companies’ management, especially for building long-term relationships with different stakeholders. Check every social ESG risk below and determine the one that impacts your company:
- Diversity and inclusion in your company.
- Respect for human rights. This is particularly crucial for your company to be considered sustainable.
- Data privacy.
- Workplace and safety conditions.
- Community engagement.
- Governance Risk
How a company is managed determines the success it can achieve. Although many companies focus on using the right governance principles, the sustainability risks they face might differ. Because the policies and planning of a company are done at the highest level of management, it is prudent to ensure that the governance risks are identified and addressed promptly. Let’s highlight some of them:
- The integrity and ethics of the business or company’s management.
- Transparency of communication at all levels of management.
- Tax compliance.
- The financial reporting and corporate compliance with different local and global standards/ requirements.
- Corruption prevention in the financial, suppliers, and licensing, among other areas.
- Anti Competitive behaviour.
- Grievance procedures and systems.
ESG Reporting for Your Company
After identifying different environmental, social and governance (ESG) risks, the bigger task for your business is sustainability reporting. Every ESG risk should have a well-laid down strategy to counter it and ensure that the company's focus helps to build its brand. The process of ESG reporting requires you to start with a comprehensive company analysis to understand the risks and opportunities. Then, you will need the preferred reporting topics, craft a strategy for addressing them, and gather data on different factors.
If your company is releasing waste into the natural waterways, consider recycling and reducing it at the source. Other strategies might include regular company maintenance, shifting to renewable energy to reduce negative impact on the climate, and product design. All along, you need to gather data on different issues that will be used for analysis and preparing ESG reports for stakeholders.
Remember that your eyes should always be trained on the targeted stakeholders, especially investors and consumers, because they are the ultimate readers of the environmental, social, and governance (ESG) report. For example, investors will want to know how the issues identified will be addressed and the long term impacts to consider investing in a company.
They will even go a step forward to compare the company opportunities, factors impacting it, and how sustainable the presented plan is.
For your ESG reporting to be complete, it is important to also have two more things: an ESG framework like the Global Reporting Initiative (GRI) or the Carbon Project and a good sustainability management app. The app is vital in helping you to follow different reporting factors, ESG risk at the global and local level, collect accurate data, analyse it, and generate professional reports. Good examples of apps that you should consider for corporate ESG reporting are diginexESG and diginexCLIMATE.
If you are targeting multiple stakeholders in different jurisdictions, consider making the ESG report available in different languages, such as English, Chinese, and French. However, you can select only one language, such as Chinese when targeting only Chinese or English if the company is interested in the UK market alone.
As you can see, there are many ESG risks that can face your company. Because every business is unique, make sure to carefully evaluate each ESG risk and craft a strategy focusing on the material topics. Again, the data you collect should be accurate and verifiable so that customers or investing stakeholders can easily understand the status of the company. If you find the process challenging, consider working with an agency of experts.
Contact us at Diginex.com for the best expert assistance and the best sustainability management apps.