When it comes to managing risk, more and more investors are turning to environmental, social and governance (ESG) factors. In fact, a recent study by Deutsche Bank found that nearly two-thirds of institutional investors believe that ESG considerations can help them mitigate risk.
Simple investigation and extrapolation of how businesses in the global market have behaved and performed over recent years will yield organisations the same conclusion that these investors have arrived at: As the business world becomes increasingly complex, the need for effective risk management systems grows, and ESG considerations must now play a crucial role in risk management strategy for businesses looking to enjoy sustained success in the long run.
The term ESG encompasses three distinct but interconnected elements: environmental, social and governance. Environmental considerations relate to a company’s impact on the natural world. This might include factors such as emissions, water and energy use, waste management and recycling. Social considerations relate to a company’s impact on society, including areas such as human rights, labour relations and community engagement. Lastly, governance considerations relate to the way a company is managed and run, covering everything from board structure and executive pay to anti-corruption measures.
Making investments into ESG can help businesses avoid reputational damage that can result from negative environmental and social impacts or negligent corporate governance. Costs associated with brand tarnishing events can be extremely high, and often last long after the original issue has been resolved. Investing in ESG can help businesses mitigate against such risks by ensuring they are adhering to best practices in these areas.
Making investments into ESG can also help businesses identify potential financial risks that might otherwise go unnoticed. For example, companies that fail to properly manage their environmental impact may be subject to increasingly stringent regulation, which will more than likely have a negative effect on profitability. Similarly, those that don’t take social considerations into account may find themselves at the centre of protests or bad publicity, which can also heavily hit bottom lines.
Aside from the aforementioned risk mitigation benefits, there are a number of other reasons why businesses should invest in ESG. A growing number of consumers are taking ethical considerations into account when making purchasing decisions, with many willing to pay more for products and services that align with their values. ESG investments can also help businesses attract and retain top talent. Younger generations in particular are increasingly interested in working for companies that are making a positive impact on the world. Finally, investing in ESG can boost a company’s bottom line by improving operational efficiency and reducing costs. For example, measures to reduce energy consumption can lead to lower bills, while initiatives to reduce waste can lead to cost savings on disposal fees.
There are a number of ways businesses can invest in ESG. One option is to invest in companies that are leaders in this area, either through traditional financial products such as stocks and bonds or through more specialist products such as green bonds. Another option is to invest directly in environmental, social, or governance-related projects. This might include renewable energy projects, water conservation initiatives or social housing developments.
Most importantly, businesses can adopt ESG-friendly practices themselves, from taking measures such as negative-emissions solutions, reducing energy consumption, improving waste management processes or implementing employee engagement programs. Other areas where ESG best practices can be adopted include supply chain management, product development, and marketing. Whatever route businesses choose to take, it’s clear that there are many options available, and just as many advantages to be gained from investing into better incorporating ESG into business operations.
Clearly evident is that ESG investments are highly beneficial in terms of both risk management and optimal business operations. However, organisations should also bear in mind non-business benefits when investing in ESG.
ESG can have a profound impact on the world around us, and businesses that make a commitment to these issues can help bring about positive social and environmental change. What’s more, by being at the forefront of this movement, businesses can improve their reputations and build stronger relationships with all their key stakeholders.
In other words, not only is investing in ESG good for business, it’s also good for the world. As awareness of ESG issues grows globally, so too does the pressure on businesses to take them into account. It is then up to each individual company to rise to the occasion and do good for both themselves and the world we live in.