What are the risks of ignoring ESG practices? (2024)

Esma statistics show that sustainable UCITs are constantly better performing than their peers. So what is the risk in not considering ESG and impact aspects?As an investor you make less money! As simple as this.

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Real ESG risks are not regulatory risks, they are business risks. A business that doesn't manage its resource consumption efficiently, it's human capital properly, it's customers responsibly, and doesn't have a transparent and accountable governance won't only fail from an ESG perspective, but will likely fail as a competitive and a viable business.

Sustainability and ESG considerations are rewiring the business world. One aspect of ESG is the concept of "internalizing externalities" via regulatory. Examples could include1. Carbon pricing: increase in costs to corporates2. Permitting delays: lower revenue growth 3. Fines: increase in costs Over the longer term, the competitive landscape in each industry could shift. Leaders on financially material Sustainability issues could emerge stronger

Failure to incorporate ESG risks into frameworks and practices can lead to financial risk in a variety of ways. Financial risk (Credit risk, liquidity risk, market risk) impacts can come from loss of assets, impacts to supply chain, damage in infrastructure, social pressures, green washing leading to fines, sudden surge in commodity prices due to unavailability etc. There are many examples.

On one hand there are trillions pledged by investors towards sustainable companies and on the other hand all investors are scared of issues arising out of non compliance leading to losses and law suits. So it’s a double whammy when it comes to financial risks. Not only will u face fines but u will lose share holder value and even stand the chance of losing vendors and customers. So the financial risk is not only in terms of fines and penalties but an overarching Damascus sword.

A company in the manufacturing industry can reduce its operating costs and dependence on suppliers by adopting energy-efficient technologies and optimizing its production processes to use fewer inputs and materials. This increased efficiency can make the company less vulnerable to price volatility, while also helping it comply with environmental regulations and avoid fines. Efficient resource management can strengthen the company's operational resilience and reduce the risk of disruptions.

Operational risk resulting from ignoring ESG practices can be significant. Physical risks will can result in property damage, business interruption, supply chain issues etc. Transition risk can lead to people risk whereby climate transition can result in in adequately trained staff. Also, transition can lead to stranded assets which no longer have any value.

Ignoring ESG practices in business is like ignoring the warning lights on your car's dashboard :) It can lead to operational hiccups and breakdowns in your supply chain. Think of climate change causing unexpected storms or droughts, disrupting how and where you get your materials. Or social issues sparking labor disputes and community unrest, like a roadblock in your daily operations. To avoid these bumps in the road, it's smart to adopt ESG practices that make your business more robust and efficient. I believe by doing so, you're not just fixing potential problems before they arise; you're also building a smoother, more sustainable path for your business's journey.

Reputational risk here results from social, industry and potentially regulatory action as a consequence of not embracing ESG initiatives or practices, but more likely as a result of making false promises and misrepresenting claims at best or being deceitful at worst.

I have noticed that those who don't want to spend time tackling ESG and environmental sustainability assessments and certifications start losing new RFPs.And, at customer renewal time, these ESG questions are beginning to pop up. So, they are risking losing existing clients as well by not having data and policies to share regarding emissions, carbon, environmental issues, diversity, human rights, and governance.

Integrating innovation methodologies with ESG opens doors to new market opportunities focused on users and communities that enable the company's long-term growth and sustainability.

Ignoring ESG practices can make businesses miss out on innovation and growth opportunities. As ESG issues create new market needs, companies overlooking these aspects risk losing their competitive edge. Embracing ESG, however, can lead to innovative products and services that meet evolving environmental and social demands. To stay ahead, businesses should integrate ESG into their strategies, turning challenges into opportunities for growth and leadership in an increasingly conscientious market.

A company ignoring ESG practices can loose access to capital, cost of capital will increase and also impact the market, going further. Implementation of CBAM and many large corporates taking scope 3, value chain emission reduction measures, human rights due diligence and other environmental, social assessments and certification will only increase the greenium further. A company with market /sector leading ESG practices and ratings will be able to a command premium.

The most dangerous risk of ignoring ESG is that with a weak Governance there is no risk management in the company. The G in ESG is the base that allows a company to ensure E and S risk management, and even more so Financial Risk and other strategic concerns. If you analyse all environmental, social and financial scandals they have a common root: something went wrong on the G.

Ignoring Environmental, Social, and Governance (ESG) practices can pose various risks. Environmentally, neglecting sustainability may lead to environmental degradation, regulatory fines, and increased operational costs. Socially, poor treatment of employees or communities can harm a company's reputation, leading to customer and investor distrust. Governance lapses may result in legal issues, financial mismanagement, and diminished shareholder value. Embracing ESG practices is increasingly important for long-term resilience and positive stakeholder relationships.