More than ever before, businesses are being evaluated not just on conventional metrics such as growth and revenue, but according to their performance against environmental, social and governance (ESG) criteria.
And this isn’t solely about an organization’s reputation with customers, partners or investors, although that is certainly part of it. ESG performance is now the subject of regulatory pressures (most notably within the EU) and is often a key factor influencing investment decisions. In this environment, it is becoming clear that ESG performance is closely correlated with business success.
Given this is the case, maintaining and improving that performance is of vital importance. The EU regulations noted above require businesses to disclose their approach to ESG and sustainability considerations, and outline potential negative impacts of the decisions and actions they take. There is no hiding place.
However, even with the best will in the world, any organization can be overtaken by events. Which brings us to the concept of ESG risk, the subject of this piece. I’ll talk more about the precise nature of ESG risk below, but it can be summarized as the risks associated with events (either external or internal) damaging the ESG performance of an organization, with all the negative impacts around business performance and reputation that come with that outcome.
In the rest of this piece I’ll talk more about forms of ESG risk, share some thoughts on how best to both identify risks as they emerge, and look at smart ways to deal with those risks or indeed eliminate them altogether.
What is ESG risk - and why does it matter?
A broader definition of ESG risk might read something like as follows (from the EU’s Sustainable Finance Disclosure Regulation):
“An environmental, social, or governance event, or condition that, if it occurs, could cause an actual or a potential material negative impact on the value of the investment arising from an adverse sustainability impact.”
That’s a useful definition, and it helps us dive a little deeper into the broader meaning of ESG and the general (and related) topic of ‘sustainability’. Specifically, ESG risk can manifest as:
- Environmental: both in terms of shock events (oil spills, pollution events) or policies and activities that cause long-term harm (fossil fuel use, the generation of waste) to the environment.
- Social: those risks (short or long term), that a company can be considered responsible for, that impact on broader society or social considerations: equality, social cohesion, social integration, labour relations, etc
- Governance: risks emerging or caused by poor management structures, employee relations, or failure to comply with relevant legislation, regulation or tax codes.
These can sometimes (as in the EU definition) be summarized as risks to an organization’s sustainability, as measured against each of these three categories.
It should be clear that an almost infinite number of events, actions and their associated risks can fit under the general ESG framework and thus be considered as ESG risks. But it is worth making certain points clear that may otherwise be overlooked:
- ESG risk can come from anywhere. Not just your own actions, but those of customers, partners, suppliers, and of course naturally occurring events and disasters: all can be the cause of ESG risks.
- Investors, and the market, decide what constitutes an ESG risk. Most of the other risks we consider in business are evaluated in terms of the bottom line. But whilst ESG risks will indeed end up impacting profitability, it isn’t for the business itself to make that call. How our behavior is interpreted by third parties is everything.
- ESG risks vary from place to place. To state the most obvious example, regulatory compliance varies across jurisdictions. But both environmental and social risks are also dependent on location and the specific circumstances relating to each of those locations.
- The nature of ESG risks is changing all the time. This is best evidenced by the fact that the whole focus on sustainability is relatively new, but even within the category new challenges and new issues are continuously emerging.
There’s no wonder that actively managing ESG risk can feel somewhat overwhelming, to the extent that some may wonder whether it is worth the trouble. Does ESG matter? The answer is an emphatic ‘yes’.
Even leaving aside non-trivial observations about the single planet currently available to us, the research suggests that strong ESG performance delivers increased profitability, and is closely correlated with ability to attract investment and market capitalization. 58% of studies find a positive impact on profitability (compared to just 8% showing the reverse), and a full three-quarters of institutional investors say they are likely to divest stocks showing poor ESG performance. Perhaps the latter is no surprise, if the former is true.
Given what is at stake, every organization on the planet should be thinking clearly about how to identify and manage ESG risks. The rest of this piece will look at how best to do that.
Identifying ESG risk with active monitoring
It is important to understand one central truth when it comes to managing any form of risk: time is of the essence.
The sooner an organization is aware of any form of ESG risk on the horizon, the more effective measures taken to control the fallout (this term being used figuratively: literal fallout suggests that it is too late for any recommendations this piece could share). Indeed, identifying and assessing risks is considered a core component of good governance in and of itself.
With this in mind, it is vital to scan the horizon for emerging threats. The good news is, in this task we have a powerful ally: a global community of journalists, investigative reporters and analysts who share their knowledge through hundreds of thousands of pieces published every day. Collectively, this community shares an amount of knowledge that no internal team could ever hope to cover.
However, making sense of this volume of data is in itself a challenge. To state the obvious, it is not realistic to attempt to read it all. Which is where an intelligent news scanning service comes in, a service capable of identifying relevant information - relevant to ESG risk specifically - and getting it in front of the right people. This is what AYLIEN News API was built to do.
Specifically, AYLIEN News API provides the AI-powered news solution that will enable your organization to identify and monitor ESG risks, and protect your ESG rating. It does this by providing:
- Comprehensive news coverage: Track coverage not solely in mainstream media, but also in longtail and specialist publications from across the globe in multiple languages: over 80,000 sources in total.
- High precision NLP-powered search: Filter out huge amounts of irrelevant news, and focus only on the news that matters thanks to highly accurate entity and category tagging, powered by our state of the art natural language processing (NLP) engine. Over 5.6 million entities are recognised, over 3,000 category topics and 1,500 industries are tagged, including over 50 ESG specific categories.
- Structured news data: Produce high quality, clean, JSON news data that can be easily delivered to any app, model or visualization tool that your organization uses for ESG risk management.
To summarize, using a platform like AYLIEN NewsAPI gives your organization the ability to identify and escalate ESG risks as they emerge. But what then?
Managing ESG risk
Not every event can be managed in a way that entirely eliminates negative impacts on the business. But in most cases the right actions, taken at the right time, can certainly help. Of course, there’s no ‘one size fits all’ approach that can be applied to every situation, but following the general principles below will certainly help:
- Act quickly. Don’t fritter away the benefits of early detection by spending too long to act. Make sure you have the processes and structures in place that support rapid decision-making and action. Give teams the individual autonomy to move quickly in response to ESG risks. Run scenarios for predictable threats so that the framework for action is already understood.
- Put the skills in place. Ensure your organization has the skills, personnel and resources in place to manage risks as they emerge. Particularly in the 2021 labor market, waiting until you need to put teams in place is too late.
- Be proactive and decisive. ESG risks demand strong, immediate responses. Take steps to immediately understand the broader implications of any particular event and do whatever can be done to get ahead of the consequences. The goal is always to take control of events before being consumed by them. This can be easier said than done, but what is certain is that making big decisions, fast, can help.
- Accept responsibility when appropriate. When it comes to ESG risks and the reputational damage that can accompany them, communication is everything. Investors and regulators are watching. Take responsibility for failures and be clear around the steps your organization is taking to make amends. Sincerity and transparency are everything.
Why not try AYLIEN News API for yourself, right now, by accessing our 14 day free trial.
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