Mitigating enterprise risk through ESG framework adoption

Today’s businesses must be held accountable to a broad range of stakeholders, including customers, employees, suppliers, communities, and, of course, investors and shareholders. Because of this variable mix, companies face unprecedented risks as stakeholders demand accountability and transparency regarding a corporation’s approach to environmental, social, and governance issues.

We know risk is the bedrock of investing. A company that ignores risks or missteps can incur significant economic costs and reputational damage. Incorporating an ESG framework into business operations and processes can help safeguard a company’s long-term success by taking steps to mitigate these risks. Here’s a look at the three types of enterprise risk through the ESG (Environmental, Social, Governance) lens.

Environmental risk mitigation

With ever-increasing attention on climate change and resource protection, environmental risks are a primary focus for investors and consumers. How a company manages its environmental risk and regulation is especially important to assessing risk and building sustainable economic business growth, especially in energy- and resource-intensive industries.

Social risk mitigation

Social risks can range from employee treatment to boycotts to labor violations to product recalls. These issues are diverse, qualitative, and can often impact all of a company’s stakeholders at once, from employees and customers to suppliers and local communities. The ability to maintain healthy, positive, fair, and ethical relationships with these stakeholders is critical to the long-term success of a company, especially if that business’s success relies on public trust.

Governance risk mitigation

While most investors have a sense of good governance practices, it’s not a “one-size-fits-all” approach. It can be difficult to identify where and how best practices might have an impact on business performance. Companies must navigate compliance and regulations relevant to their industry, consider the role of the board of directors when overseeing risk management policies, develop sound systems of risk management and internal controls, determine what disclosures need to be made to the public and investors, and provide guidance for sound decision-making and effective allocation of resources.

ESG reporting can help companies shift from a compliance-based, reactive mindset to a forward-thinking, proactive risk mitigation approach. ESG data helps companies engage in effective risk management that allows management teams to plan for compliance objectives, enhanced and voluntary disclosures, and risk mitigation strategy roadmaps that address threats before they happen.

Ignoring risks can contribute to long-term negative impacts such as a lack of funding, exclusion from key stock indexes, and public stigma. Companies that don't adapt may avoid pitfalls in the short term, but over time, they can put their business and their investors in jeopardy with more risk or lower returns.

Viewed through the ESG lens of risk management and due diligence, companies can consider the following questions:

• Which environmental, social, and governance issues are financially material for your company or industry?
• How is your company tackling these material risks?
• How will these risks affect your company’s long-term value and growth?

Proper risk mitigation makes for less volatile companies and provides greater confidence for investors. These companies are rewarded through access to credit and debt markets, positive brand equity, reinvestments, and sustainable long-term growth.

ESG materiality assessments

With investors inquiring more and more frequently about what your company is doing in regard to responsible investment, how you treat employees and vendors, your dedication to sustainability initiatives, and other activities that fall under the ESG umbrella, it’s important to have answers to these questions.

An ESG materiality assessment empowers you to easily report on your current state and outline future initiatives while taking into consideration your business goals and risks. Download our guide to creating and extracting the maximum strategic value from an ESG materiality assessment.

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Helee Lev

Helee joined our team in 2012, overseeing strategic account management, new business, and industry alliances. In 2015, she participated in raising $5M of venture capital funding. She leads sales, business development, and Conservice ESG's strategic consulting group.

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