10 Aug 2022

ESG Risk Management: Key Aspects You Need To Know

Risk Management strategies are designed to help organizations deal with a wide range of risks. In the past, this range mainly consisted of financial, compliance, or operational risks. 

A new class of risks has emerged in recent times and is known as ESG risks that address environmental, social and governance issues. ESG Risk Management has emerged as an important aspect of risk analysis and management for any company or organization.

Understanding ESG Risk Management

What are ESG Risks?

ESG risks include a wide range of issues from water usage and greenhouse gas emission to anti-discrimination and fair wages to business conduct matters.

These risks are mainly grouped into three categories:

1. Environmental Risks

These risks include environment-related issues such as Greenhouse gas emissions (GHG), deforestation, pollution, water usage, biodiversity, waste, etc.

2. Social Risks

These include factors such as customer relations, human rights, labor rights, employee relations, occupational safety and health, supply chains, diversity, inclusion, etc.

3. Governance Risks

These risks include issues such as succession planning, board management practices, executive compensation diversity among board and management, corruption, fraud, data hygiene, security, equity, etc.

ESG Risk Management

Like other risk forms, ESG risk management also involves the same three steps – Identify the risk, quantify the risk, and manage it for better organizational sustainability.

With this new focus on ESG factors in risk analysis, decision-makers need to quantify the ESG risks for effective risk management

ESG risks are quantified and reported in the form of a company’s ESG risk score or rating. A low-risk rating indicates effective risk management and a high-risk score signifies inconsistencies in ESG risk management.

Every company is vulnerable to ESG risks and requires ESG risk management to avoid financial or reputational damage. Irrespective of the size of the company or organization, incorporating ESG risk factors in the decision-making process amounts to effective risk management.

To stay ahead of the curve, opting for risk analysis services from companies such as Research Optimus could help your organization identify, quantify and manage ESG risks effectively.

Benefits Of ESG Risk Management

1. Enhanced Sustainability

With a better understanding of ESG risks, companies can effectively utilize their resources, tackle rising operation costs, make safe investments, improve employee retention and adhere to regulations easily.

Recognizing these potential risks and effectively managing them not only makes the organization resilient to future challenges but also provides a competitive advantage.

2. Improved Regulatory Compliance

With the growing stakeholder demands for accountability, there is also an increase in the regulatory obligations for ESG. 

Integrating ESG factors as a part of the risk management structure makes communicating effectively with governing authorities easier thereby, minimizing the resource burden and requirement for legal intervention.

3. Increased Investment Potential

Socially aware investors are now seeking the integration of ESG values into their portfolios to ensure sustainable investments. Those organizations that have well-established ESG risk management systems fare better in attracting investors.

4. Better Employee Productivity

Organizations with the highest employee satisfaction had ESG scores 14% higher than the global average, likely due to their strong environmental performance [Marsh & McLennan].

An ESG-conscious organization can enhance employee productivity, motivation, and retention by inculcating a sense of purpose among the workforce.

Additionally, organized ESG risk management promotes employee well-being through considerations such as health & safety, work schedules, diversity, and inclusion. This not only enhances employee experience but also stimulates better performance.

5. Greater Profitability

Mitigating ESG risks not only makes a company favorable for investments but also enhances its profitability. 

According to McKinsey research, ESG strategies can affect operating profits by as much as 60%. ESG responsive organizations are more likely to attract customers and top talent thereby, promoting their top-line growth.

Better Understanding of ESG Promotes Effective ESG Risk Management

Without a complete understanding of ESG risks, businesses can neither manage the risks effectively nor leverage the benefits of ESG risk management. ESG risk management has thus become an essential component of the modern enterprise management framework.

According to  S & P Global Market Intelligence report, 80% of the world’s largest companies are reporting exposure to physical or market transition risks associated with climate change. 

With such a huge number of companies acknowledging the importance of ESG risks and the necessity for better management, staying relevant in terms of ESG risk awareness is more important than ever before.

Keep your Risk Management system aligned with emerging ESG Risks. Avail Risk Analysis services from Research Optimus today!

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