Future Environmental, Social and Governance megatrends – worth the risk?

Matt Farnsworth, Associate Director for Transaction Advisory / Due Diligence Services, considers Environmental, Social and Governance (ESG) trends and their potential future impacts; “As we examine recent corporate events and look ahead it’s clear that the breadth of issues facing modern business has proliferated. Aside from the geo-political and economic uncertainties, the outlook for environmental and social issues looks challenging”.

As strategic advisors to businesses during operational change or company acquisitions and disposals, RPS is commonly required to examine the ‘what if’ future scenarios and how Environmental, Social and Governance (ESG) trends are likely to impact long-term.

According to the World Economic Forum’s Global Risk Report for 2018, four of the top five risks now include environmental and societal issues, including extreme weather events, water crises, natural disasters and failure to mitigate or adapt to climate change.

We have already seen how businesses and livelihoods have been disrupted by both natural and man-induced events in recent years, from the Rana Plaza factory collapse in 2013 to the emissions scandal in 2015 and the more recent plastics debate in 2018.

“Businesses are no longer able to focus solely on financial performance alone and need to be more accountable to their stakeholders and investors” advises Matt. “There is a need for integration of ESG factors into day to day decision making, and changing the way in which a business accounts for itself and its behaviour”.

“So as we look ahead at the global megatrends to see a future with demand for freshwater exceeding supply by 40% by 2030, and related food and resource scarcity; projected urbanised population growth placing strain on infrastructure and services; wealth imbalance and income shifts; and changes in patterns of energy demand, not to mention the implications of climate change, there are a number of challenges, but moreover, plenty of opportunities”.

Weathering the storm

Some businesses appear to weather impacts with ease, while others slide into decline and occasionally administration. “In a world where social media can highlight the use of supply chain child labour overnight, or where issues of global water scarcity can effectively remove a company’s ‘licence to operate’, such emotive issues are now broadcast faster than a company can react“ warns Matt. “So, ultimately, we’re talking about ESG risk management and resilience. As the issues become more complex and yet interrelated, companies need to take more of an active role in acknowledging ESG trends facing the business and integrating these into their operational strategies and due diligence activities. Only then can all the possible risks, opportunities and impacts be fully understood and prepared for. After all, it makes sense to not only protect and enhance the business, but plan to help it respond to future scenarios”.

Failing to place ESG at the heart of the business

In 2017, the World Business Council for Sustainable Development (WBCSD) proposed the introduction of enterprise risk management as a means to manage ESG issues. They found that businesses were failing to place material issues at the heart of businesses to the extent they became disconnected from business strategy.

“We’d agree that without a connection to core business strategy ESG factors run the risk of being siloed to a disconnected sustainability department. Which worse still, is then wheeled out only to address whatever issue is in the news that week, as a temporary sticking plaster that rarely adds long term value” adds Matt.

“Fortunately, the majority are no longer easily hoodwinked with false promises and short term declarations of action. Companies are judged by their longer term performance and critically, the level of trust built up by their customers”. In early 2018, the WBCSD and the Committee of Sponsoring Organizations of the Treadway Commission (COSO) further explored the possibilities for introducing enterprise risk management systems into business as a means to control ESG risks. Businesses have until the end of June 2018 to comment on the guidance, which is out for public comment.

“We see this as a welcome addition and one which businesses would benefit from accommodating. It’s evident to see that if businesses can be more clearly informed on the risks presented to them, then they are themselves better prepared to respond and put in place the measures needed to mitigate those risks to the business, stakeholders and wider society” concludes Matt.

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