The term "ESG risk" emerged in the 1990s during the Asian financial crisis. Investors realized that environmental, social and governance (ESG) issues could affect company performance. Since then, the term has evolved and now refers to all the risks that can affect a company, whether they are related to its environment, its employees or its governance.
These risks have a significant impact on financial markets and must be taken into account by investors. It is essential for companies to engage in ESG governance. It is an integral part of a sustainable strategy and can contribute to the long-term success of companies. Through this blog, we will try to deepen our knowledge on the topic, its impacts on companies and the measures that allow for better prevention.
ESG Risk Management: A "Good Deed" or a "Sustainable Success Factor" for Business Environmental, social and governance (ESG) risk management programs are a means of identifying and analyzing factors that may negatively impact overall industry performance. In addition, ESG risk management is monitored by various stakeholders, such as investors, local communities, customers and employees. Fortunately, there are a variety of organizations willing to help make this task less daunting. The benefits of early action outweigh the consequences of inaction, especially for mid-sized companies whose budgets cannot afford a major ESG scandal. The concept of "ESG risk" is not new; there is evidence of interest in these issues for several decades. Nowadays, there is an increased sense of urgency regarding the need to tackle these matters, as well as a different approach. Companies are under more pressure than ever to set clear goals for reducing risk, to effectively measure their progress, and to report transparently.Integrating ESG factors into decision-making is a form of responsible risk management, regardless of company size or industry. Companies need to consider a range of ESG issues, and some of which them have a significant impact. Those that fail to do so are at greater risk of being affected by ESG-related incidents or controversies. In short, ESG risk management is something that every company should integrate in order to limit the potential consequences for itself and its investors. For their part, investors - particularly large institutional funds such as pension funds - are increasingly looking to support sustainable businesses that will provide reliable returns over the long term. Demonstrating responsible business practices is therefore an important way for an organization to differentiate itself from its competitors and attract investment. Strong ESG practices ultimately make companies better. They are more sustainable and less risky, which is in the interests of investors.
CSR & ESG - Both Compatible and Independent Corporate Social Responsibility (CSR) initiatives, which differ in some respects from ESG programs , are already commonplace in many companies. The two terms can be compared, but they are not the same. CSR programs are voluntary and generally focus on strengthening a company's partnerships with other groups. CSR managers, for example, may be responsible for partnerships with community organizations or corporate charities. In order to meet the requirements of investors or regulatory authorities, ESG programs are typically implemented as part of a broader business strategy. Applications of ESG principles involve very rigorous assessment and reporting on environmental, social and corporate governance activities. Whereas CSR was about holding companies accountable, but only in terms of self-imposed standards, ESG criteria allow for a better measurement of the overall impact of a company's activities. Thus, although they are related, CSR and ESG aim to meet different purposes.
ESG scores: A barometer of sustainable performance The acronym ESG refers to a company's environmental, social and governance performance. These three factors are integrated with traditional financial scores to better understand the environmental, social, and governance impacts that result from a company's investments. To add to the challenge, ESG reporting is not yet standardized. This is where ESG scores and risk ratings come in handy. ESG rating providers generate an ESG score or risk rating for companies based on existing data. Incorporating ESG data into the portfolio can improve performance and reduce overall risk. There are many non-financial factors that are not reflected or disclosed by a company that could impact its long-term sustainability. These factors are subject to scrutiny, with different methodologies used by vendors to assign scores. Each assessment is unique and the definition of a "good" score varies by supplier. There is no doubt that these scores are increasingly important to decision-makers and CEOs as they serve to assess the ESG risk profile of a company, helping to identify where a company can improve its risk management. However, a score does not measure an organization's overall morality or impact on the world; rather, it is based on the information it provides about its sustainability performance as well as what the markets are saying (e.g., via the news). If your company does not receive the expected ESG rating, this is an opportunity to take steps to minimize potential adverse consequences. To mitigate ESG performance risk, several tools are available: CSR (Corporate Social Responsibility), ESG reporting, environmental labels and ISO 26000 certification. The ISO 26000 standard defines what social responsibility is and provides organizations with concrete means to fight against their harmful practices. It applies to large corporations as well as to small and medium-sized businesses. As you can see, sustainability is the name of the game. Being aware of the benefits of ESG allows organizations to tackle this issue with greater confidence. To respond to climate change, we must adapt our behaviors and invest in companies that value social and environmental sustainability (ESG). It is essential that we all work together to create a more productive, stable, and secure environment where everyone benefits.