A New Emerging Risk: ESG Risk and How to Manage It
In this new era, managers and stakeholders are more concerned about the eligibility of the companies and their capabilities to survive in the long run by maintaining the business’s environmental, social, and governance aspects.
Thus, this increasing concern and focus on ESG of the business are giving rise to this new risk called ESG risk. Businesses must focus on eliminating the ESG risk as much as possible. Businesses and organisations should know from where these ESG risks are emerging. How can they efficiently eliminate the risks for better functioning and sustainability of the business?
Managing ESG Risk
ESG risk management includes the analysis or management of the business’s environmental, social, and other governance practices, and the impact of all three factors on the business. Moreover, the progress of the business is also analysed during the ESG management. This ESG program is conducted under risk management practice.
The ESG performance is essential to stakeholders like investors, lenders, customers, employees, government agencies, etc. It enables these stakeholders to know the position of the business and their ability to survive in the long run. Furthermore, they can decide wisely for future deals and business with it.
ESG risks are emerging with time because public and regulators’ interest is growing in knowledge about how organisations manage and address the major ESG issues, like climate change, fair labour, ethical business conducts, etc.
Furthermore, another new practice is implemented where the regulators have made ESG disclosure mandatory for businesses like the UN has a non-financial reporting order. However, they are still ordered to provide a new corporate sustainability reporting. The U.S. is also adapting soon to this new requirement of enhanced ESG disclosure for publicly traded businesses.
These reportings and disclosures will enable the regulators to better measure the ESG factors and other activities. This standardised measurement of the disclosure will enable the investors to compare the disclosures of different companies efficiently. They can make better and wise decisions about their future investment potential.
Moreover, companies must keep in mind that they have to consider ESG-driven risks while using and developing risk management rules or frameworks as it creates complexities. Those matters show how important it is for the companies to identify all the ESG risks. They need to try and analyse how these ESG risks can be eliminated for sustainable business conditions or positions.
ESG Risk Management and Its Importance
ESG issues are becoming more important for stakeholders, from investors and customers to employees, social communities, and government regulators or authorities. When the ESG performance of a company is firm, it means they can get more significant business opportunities, capital, and talent access. Thus, organisations must integrate ESG management into their risk management framework.
The emerging ESG risk also needs excellent consideration of the ESG factors to minimise the ESG risks and increase the business sustainability.