Ignore environmental, social, and governance risks at your own peril
Palladium's Alexandra Britton explores how companies and investors can benefit from adopting ESG standards.
Environmental, social and governance (ESG) concerns can make or break a company. Neglect them, and it can be the downfall of your brand. Just look at the BP Gulf oil spill, which still plagues the company’s reputation eight years later. On the opposite end of the spectrum, ESG issues can define your brand and company values. Patagonia’s identity stems largely from its sustainability practices and the values it embodies.
Most firms, though, fall somewhere in between. They know managing ESG risk is important, but they don’t let it define them as a company. While I wholeheartedly believe that shareholder value and standards that underlie inclusive growth cannot be separated, not all corporations are ready to integrate positive impact principles into their corporate strategies. For these firms, sound ESG risk management not only can protect their reputations but also help increase efficiency and improve their bottom line.
Why should you pay attention?
As Warren Buffet said, "It takes 20 years to build a reputation and 5 minutes to ruin." While the reputational risks of mismanaged environmental or social issues are clear, the business case for ESG management goes beyond this. Regardless of your company’s size or age, reporting on and effectively monitoring ESG issues can drive value and mitigate highly damaging risks to your operations and bottom line over time.
Companies and investors alike can benefit from adopting ESG standards. In addition to improving customer loyalty, integrating ESG mitigation and management has the potential to create operational efficiencies, lower operational risks and costs, identify potential new sources of revenues, and allow for new market entry. Additionally, establishing environmental, social and governance safeguards and policies could lead to improved ability to attract, retain and motivate staff.
Harvard Business School professors undertook a study to determine if ESG factors have measurable effect on an investment’s financial performance. The answer is, in effect, yes. Using a framework from the Sustainability Accounting Standards Board, they found that firms that performed well on material sustainability issues significantly outperformed firms with poor ratings on those issues.
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