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ESG stands for Environmental, Social, and Governance. These are the issues that businesses today are taking a stand on, and they’re a lot more complicated than a simple acronym might suggest.
Companies that can achieve a positive ESG stance have a firm grasp on the risks facing their organizations and earn all the benefits of doing so. It’s essentially an indicator of a business’s performance and objectives that go beyond monetary metrics.
ESG risks can be broad and varied. For example:
Environmental Issues, such as recycling, emissions, use of resources, and waste disposal.
Social Matters, such as labor rights, parental leave, and staff health initiatives.
And Governance affairs such as integrity of operations, shareholder rights, and financial reporting responsibilities.
The key to understanding a company’s ESG situation and finding ways to improve it is to gather data on internal processes and third-party relationships.
ESG matters to the stakeholders of the company such as Customers, Employees, Investors, Business partners, and Government regulators. These groups want to have an accurate picture of how the business handles its ESG responsibilities so that they can align their interactions accordingly.
Investors ask about the ESG risk mitigation efforts of their investment companies to ensure that their choices align with their own values. A positive ESG posture also helps protect that investment.
Governments are also becoming more interested in ESG frameworks and standards, for example, the ESG Disclosure Simplification Act which is currently in progress within the US.
ESG is ultimately a form of risk management, which means part of the job is assessing a company, monitoring its ESG metrics, addressing its problems, and reporting on your findings.
Start by identifying the specific risks associated with a particular industry or company. For example:
- Regulatory risks like emissions reporting requirements, permits, and exposure to lawsuits.
- Technological risks arising from a failure to adopt newer, more efficient technologies and tools.
- Market risks such as changing prices of raw materials or new competitors entering the industry.
Now, search for opportunities to respond to those risks. For example:
Switching to more efficient energy sources and streamlining operations cuts down on your carbon footprint and keeps you more compliant with environmental regulations.
Responding to changing market demands by developing new products, services, and business models.
Expanding your supplier base and accessing new markets to diversify the organization.
Thanks to your efforts in ESG compliance, you or your investment properties can enjoy lower expenses, fewer run-ins with the law, better productivity, and a stronger bottom line.
While the cost of monitoring and maintaining ESG compliance seems high, keep in mind that leaving these risks unchecked can result in severe consequences.
Some recent examples of such disasters are BP’s Deepwater Horizon oil spill, costing the company 65 billion dollars, Michigan’s water crisis costing the state 600 million dollars, and Volkswagen’s hidden toxic diesel emissions resulting in a charge of 31.3 billion euros!
Don’t end up like these businesses or their investors. Make ESG compliance a priority today to ensure that you only work with firms that match up with your values.
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