It is high time, the board members start considering the Environmental, Social, and Governance (ESG) risks. Why? Because they have financial consequences. According to a CDP report, 87% of the companies identify deforestation risks & out of them, 32% are already experiencing those risks.
Also, according to Strategy&, a part of PWC network, in 2018, for the first time, a lot of CEO’s were fired for ethical lapses then financial reasons, which means more and more board members have started taking accountability for ESG risks. Why? Because ESG risks have started affecting all the companies financially and, the unaddressed ESG risks will further infuriate the stakeholders.
The Wall Street Journal reported PG&E Corp’s bankruptcy as the first climate change bankruptcy this year. Some of you might think this is unheard of, bankruptcy due to climate change? Yes, ESG risks are having its impacts when not foreseen by the boardroom members.
So, what’s the solution? The board has two choices. They can either be reactive & deal with the risks as and when they arise or they can be proactive & work towards creating solutions before such risks arise. There are 3 core areas where the board members can work on to mitigate ESG risks:
- Risk Identification
While creating the enterprise risk management strategy, the board members need to factor in ESG risks that will impact company’s supply chain, operations, employees and its overall reputation. The board can factor in the ESG risks by combining the environmental risks with the compliance & health & safety risks to create a sustainability department to withstand such risks.
- Risk Assessment
If ESG risks are considered as immaterial, it will further impact the business operations negatively. ESG risk assessment can be carried out by scenario analyses & materiality assessment wherein they define the purpose & scope, identify the potential risks, categorize them and finally gather information about the impact these risks will have on the overall business.
- Risk Mitigation
Post identification & assessment of ESG risks, the board members need to strategize how to mitigate risks. For e.g. offsetting risk by diversification through mergers & acquisitions, taking out insurance on business operations, or by addressing the risks in an organized manner. As per a report by the Corporate Giant PepsiCo, if they receive a capital expenditure assessment request of $5 Million or above, they always consider the criteria of environmental sustainability.
ESG risks are prevalent and it is advisable for board members to start considering how to deal with ESG risks if they haven’t yet considered the same. If ESG risks are foreseen and if they are included in the traditional risk oversight role, the board members will be able to mitigate them early on. This can be done by recruiting board members who have climate expertise or climate competent. Additionally, technological advancements can be taken into consideration to mitigate environmental risks by setting up environment friendly business processes.