ESG: What is it and Why do we Care? (Part II)


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A 2014 survey of US Fortune 500 corporations indicated that 6 out of 10 respondents believed water-related issues will negatively affect business growth and profitability within five years, and 8 out of 10 believed it would affect their decision on where to locate facilities.

Example: Financial impacts relating to water quality (CDP 2016 survey)

Financial Impacts Relating to Water
Source 1 VOX Global/Pacific Institute, 2014 Figure 1 Financial impacts relating to water quality (CDP 2016 survey)

The scarcity of Environmental Resources is poised to Increase

Environmental resource scarcity is poised to increase in coming years as a function of the compounding impacts of decreasing availability and declining quality.

To plan operations in the era of increasing scarcity, businesses need to rethink the use of resources by moving away from considering environmental and social resources as inexpensive consumable goods towards seeing them as valuable recyclable assets.

(E)nvironment + (S)ocial + (G)overnance = Sustainability

While Sustainability is a broad concept and has been defined and interpreted in different ways by different people and stakeholders, from a corporate standpoint, sustainability strategy for a company is widely accepted to be defined as the operational strategy that can create value for shareholders over the long term and contribute to a sustainable society. From an investor standpoint, the sustainability strategy is the investment strategy that creates value over a long period of time, recognizes companies that pose high sustainability risks and rewards those companies that are performing well in those dimensions.

There is a wide consensus among the opinion and decision makers to define sustainability as a measurement framework that rests on three pillars: Environment, Social and Governance, commonly referred to by their acronym ESG.

All major global standards, including most widely accepted SASB and GRI, are designed to improve the effectiveness and comparability of corporate disclosure on material environmental, social, and governance (ESG) factors in SEC filings such as Forms 8-K,10-K, 20- F, and 40-F.

Introduction to ESG Risk Analysis

Mismanagement of environmental and social resources can result in litigations, affect license or ability to operate, increase its risk profile and ultimately resulting in higher cost of capital (SASB, 2014). S&P Global Ratings (S&P), the world’s leading credit rating provider, already uses environmental, social and governance (ESG) metrics to measure the performance of businesses. (S&P, 2016).

Understanding true Value-at-Risk leads to better planning

This disconnect between the true value and current cost of environmental and social resources results in “risk blindness” for businesses. Managers are not able to substantiate the business case for investment in ESG strategies that pro-actively address ESG risks. Not having clear goalposts makes it difficult for managers to set meaningful, context-based targets for water reduction and communicate effectively to customers, investors and other important stakeholders.

This disconnects between the true value and current cost of environmental and social resources result in “risk blindness” for businesses.


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