ESG risks are a combination of opportunities and threats that can significantly impact an organization’s reputation and financial performance. If poorly managed, the consequences may include legal penalties, fines, and the loss of trust from customers, employees, and investors. On the other hand, if an organization adopts an integrated approach to risk, the benefits can include improved profitability, a positive image, trust, and even more opportunities for expansion and growth.

Poor risk management can lead to serious crises and scandals. Therefore, businesses should actively manage ESG risks to protect their reputation, ensure long-term stability, and fulfill their commitments to stakeholders. Effective ESG risk management can contribute to building a more resilient, sustainable, and ethical business.

Although we can find examples in the media of large, well-known companies suffering from multi-million dollar financial losses (which we list below), you must know that negative scenarios and “failures” related to ESG affect every business and organization, regardless of size or industry.

Remember: ESG risks can impact operational capabilities, costs, and profits, and thus the economic situation of the organization. Additionally, they can have a detrimental impact on reputation, and consequently, the company’s value in the eyes of partners, clients, and investors.

What are the types of ESG risks that can impact business continuity? Here are 5 selected ones:

1. Supply chain disruption – This may occur due to poor organization, political tensions, insolvency of contractors, or even a natural disaster.
2. Extreme weather events – Floods, droughts, and hurricanes can effectively prevent business operations.
3. Energy supply disruptions – This may happen due to technical failures or weather conditions.
4. Failure to comply with labor laws and conditions – Low wages, unsafe and unsanitary working conditions, excessive working hours can lead to decreased employee motivation, attrition, or even strikes.
5. Poor management – Lack of transparency and accountability in the board of directors, conflicts of interest can lead to stagnation, or even fines and compensation.

Most of these risks can be mitigated by incorporating them into an ESG risk management strategy. For example, the risk of power supply disruptions can be minimized by investing in solutions that ensure energy independence and energy efficiency. For risks related to suppliers, organizations can safeguard themselves by partnering with responsible partners. Legal compliance can be ensured through support from a consulting firm that will, for example, conduct an external audit to ensure the organization has aligned all areas of its operations with the applicable laws and standards.

Of course, these are just some of the risks. The list can be much longer and more diverse depending on the industry and the specific activities of the organization. We wanted to demonstrate that ESG is not a novelty and encompasses risks that organizations worldwide are already facing. Moreover, most of them are already well-known – an excellent example being climate change, one of the most well-diagnosed risks.

Let’s now look at some well-known cases that demonstrate how ESG risks can affect (and have affected) businesses. Let’s start with environmental issues.

Companies that fail to comply with environmental protection regulations can face significant legal penalties. One example is the case of Delaware International Petroleum Corporation (IPC), which in 2017 was fined $1.3 million and ordered to pay $2.2 million in compensation for “environmental crimes,” including illegal wastewater discharges and a conspiracy to violate the Clean Water Act.

When it comes to social risks, poor management can harm a company’s image and affect its relationships with customers and employees. This is supported by the “Global Culture Survey 2021,” which found that 83% of customers would base their continued support on how a company treated its employees during the pandemic.

So, how can social risks impact a business? A noteworthy example is the South Korean car manufacturer Hyundai Motors, which sold its Alabama-based subsidiary due to allegations of child labor. Additionally, in the United States alone, 117 sanctions were imposed on companies accused of using forced labor involving Uyghur populations, resulting in 2,325 shipments being denied and 988 shipments being held in anticipation, totaling a value of $826 million.

An economic blow also affected Apple. It is estimated that the tech giant lost between $4–8 billion after announcing, in early 2023, its plan to reduce risks in its supply chains and implement a decentralized production plan, expanding its operations in India by 25% by 2025.

Corporate governance-related risks, if poorly managed, can lead to scandals that severely damage a company’s reputation and finances. A fairly common and illustrative example, in terms of scale and severity of penalties, is the 2015 Volkswagen case. The company admitted to falsifying emissions tests and had to pay a hefty price—fines, penalties, buyback costs, and financial settlements totaled $35 billion.

As we mentioned earlier, one of the best ways to ensure that your organization is compliant with legal requirements and ESG standards is to work with a consultancy firm. PBSG is one such firm.

We are experts in risk management. For years, we have been collaborating with organizations and companies across various industries. Our extensive experience and commitment to keeping our offerings up to date enable us to tailor our services to the specific needs and scale of any business. With our help, you can be confident that your organization will be adequately protected against risks, while also quickly and efficiently adapting to new and increasingly stringent ESG regulations.

Remember: By properly identifying, assessing, and mitigating ESG risks, you will be able to build a stable and resilient business, positively impact the community and environment in which your organization operates, and seize opportunities for growth and strengthening relationships with partners.

Check now whether you are managing waste properly, how you can reduce pollution emissions, whether you are conducting sound corporate governance, and what positive contributions you can make to the local community and your employees.

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