the voice of risk: how to avoid ESG missteps
by Carl Densem As risk managers, we are in the room to think ahead and often at crosscurrents to the consensus. If the business is determined to follow a new strategy, we are there to ask what dangers it might pose and how they could be mitigated, avoided, or protected against. Our job is to short-circuit the consequences of ill-advised actions. Economic, Social and Governance (ESG) is no different. ESG is a prominent concern for global investors (79% consider it an important factor in investment decision-making1), who are escalating demands for action and transparency from corporations. Companies are responding feverishly with long-term carbon-cutting goals, sustainability efforts, and eyeing community pushes that will prove their seriousness. All of this is outside, as of today, a unifying and clear framework for materiality, how meaningful data are shared and progress measured. Risk managers on all sides should be aware of this dynamic. While ESG has the potential to reap rewards, this depends on how carefully plans are rolled out. Risk has its place in clarifying terms, asking the uncomfortable questions, and provoking thought on what could go wrong.
background ESG is nothing new, having been through more transformations than Madonna. An early form of ESG began in the 1960s, before the Queen of Pop even hit adolescence, as “socially responsible” investing2 and today is enjoying its latest revolution. ESG, as a conceptual basket, comprises ethical ideas about how corporations should behave regarding their non-financial responsibilities. The basket has dropped some outdated ideas and picked up glitzier ones over the years. Critically, in this appearance, ESG is more focused on longevity. As an OECD paper on ESG investing puts it, there is “growing momentum for corporations and financial institutions to move away from short-term perspectives of risks and returns.” 3 By their nature, ESG factors are complex and range in time horizon from the immediate to generational, out to existential (climate, for example). This presents a great analytical challenge to those attempting to integrate factors into valuation and business models. More so, they can be fairly abstract, escaping simple and agreed-upon descriptions.
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Intelligent Risk - April 2022
