ESG risks: operational and investor perspectives

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ESG data can give context to the financial disclosures of a company, and provide indicators regarding its longevity and sustainability.

Environmental, Social, and Governance (ESG) issue tracking and public reporting has become as important as tracking and disclosing financial results. The benefits for a business from an operational perspective comes in the form of linking these ESG issues to risk areas within the business.

A company needs to undergo a process of determining which ESG topics are considered relevant and material to its operation, to its stakeholders, and to its environment. Data then needs to be gathered for each of these material topics, analyzed, the risks understood, and practices established to reduce impacts where relevant.

For example, issues such as water availability, consumption, and discharge will be of higher relevance to a coal-based power generating plant which uses vast amounts of water in its processes, as opposed to a site generating power through photovoltaic panels which can continue operations somewhat undisturbed in the event of water scarcity.

Material issues are often incorporated into operational risks, objectives, and targets, and tracked accordingly. A company that can adequately monitor and mitigate risks may see accompanying benefits in terms of measures like increased efficiencies, reduced costs in materials usage, reduced resources required, usage of innovative new technologies, and in general, becoming more socially and environmentally aware.

A company that has a better understanding of, and is actively working towards, an overall positive impact on society and on the environment is not only more attractive to customers, but also to employees in terms of attracting new talent and retaining a faithful workforce.

With regards to investment, the economic benefits far outweigh the time and resources required in synthesizing the non-financial/ESG data disclosed through structured ESG reporting standards and frameworks.

A more comprehensive picture can be viewed through the lens of ESG, in that this data provides the color and context to the financial disclosures of a company and an indication of how well a company is doing in the greater scheme e.g. how often do they come under fire for poor employment practices or pollution scandals?

These are clear indications of the longevity and sustainability of a business – not just in terms of environmental long-term effects, but also regarding innovation, the availability of resources, and the sustainability of the long-term market for its products and/or services.

As a simple example, a vehicle manufacturing company may reflect poorly in the current financial year’s disclosure statements due to the outlay of large amounts of capital pushed into the research and development of sustainable practices such as alternative fuel sources, or the development of alternative powertrains beyond internal combustion engines.

Whilst this may make the company appear to be a weak choice for an investor, a closer review of its ESG disclosure reports may generate a more complete picture of the organization from a long-term investment perspective.

This vehicle manufacturer may in fact be well-placed in a world that is facing dwindling oil reserves, increased fuel prices, and ever-expanding regulations regarding vehicle emissions.

The non-financial disclosure report allows the investor greater insight into these types of details that would otherwise have been missed, should they only have viewed the financial data.

According to the Capital Group ESG Global Study for 2021, only 28% of investors felt that financial performance was not directly improved by ESG factors. This is a clear indication of the gravity that ESG disclosures hold for decision-making beyond the mere financial.

The IsoMetrix ESG solution provides companies with a management system that defines and assists to manage all ESG initiatives.

It helps to minimize the time-consuming task of collecting data, as well as track and close-out ESG-related findings, provide a holistic view of ESG performance, and report on required ESG standards.

Get in touch with us for more information on IsoMetrix’s ESG management solution.

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