The Value-at-Risk from environment issues combines three types of costs:
Examples of ESG issues related Risks Manifestation
Example: Impact of “true cost of water” on company profit margins
If the full costs of water availability and water quality impairment had to be absorbed by companies, this would equate to a decline in average profits of 18 percent for the chemical sector, 44 percent for utilities and 116 percent for food and beverage companies (Trucost, 2017).
Increasing availability of ESG data, frameworks and calculators
ESG risk analysis space is rapidly evolving and there are new data sources, risk calculators, risk scorecards and frameworks becoming available to businesses. For example:
- The Natural Capital Coalition (NCC) has developed a standardized framework to measure and value business impacts and dependencies on natural capital;
- CDP, GRI, and SASB have developed guidance to help businesses disclose information on their material ESG risks;
- Veolia has developed the “True Cost of Water” tool that combines traditional Capex and Opex calculations and analysis of water risks and their financial implications;
- RepRisk provides reputational risk scorecards for companies;
- WRI Aqueduct Tool provides publicly available, quantitative data and spatial mappings of global water availability and quality risk.
- There are also tools specifically for investors, such as from TruValue Labs etc.
2. The Current gap in ESG landscape: Need for better ESG Reporting
Investors, stakeholders and businesses alike need high quality, consistent and reliable information to quantify and monetize ESG-related business value-at-risk in order to incorporate the inputs into existing decision-making frameworks and factor ESG-related risk value alongside operational costs and revenue forecasts.
While it has been empirically established that material ESG parameters are positively correlated with company performance, the investors and other stakeholder community continue to face challenges with access to quality information from the companies. It is only when companies can generate high quality and reliable information, these stakeholders can sift through it, apply analytical models and convert it into actionable signals.
Various surveys have shown that a significant % of the CEOs of corporations not only recognize but are more serious than other managers in considering sustainability as one of their top priorities.
As per the survey conducted by McKinsey, the top-3 reasons given by CEOs to consider sustainability as their top priority are:
- Strategic alignment with ESG
- Reputation risk management
- Cost cutting