ESG Risks – Which one matters most: E, S or G?

As companies continue to put serious weight behind Environmental, Social, and Governance considerations when making strategic and operational investment decisions, the question of which one—positive environmental effects, positive social effects, or positive governance effects—continues to be important. This is a good question – and it’s often difficult to answer.

Is an electric car company with a bad track record on labor rights doing well with ESG? How about an oil company with a significantly diverse board? A recent column in JDSupra provides some interesting insights: When evaluating empirical research, good governance influences materiality the most. … Research indicates that the governance category has the clearest link to financial performance, as factors such as anti-bribery and anti-corruption programs, executive pay, or board diversity show the strongest forms of correlation. This also holds for fixed-income investors, as business ethics, transparency in executive pay, and board diversity are more important in preventing corporate bankruptcy than are environmental and social factors. The JDSupra article brings up an important point about ESG risk investing: It isn’t just all about the share price. From the article: The financial materiality of ESG is not only present in equity investing; it also plays an increasingly important role in the credit decisions of fixed-income investors. To reflect this growing importance, the 2021 statement released by the UN Principles for Responsible Investment, which was signed by more than 180 investors and 25 credit rating agencies, committed to incorporating ESG risk into credit ratings “in a systematic and transparent way.” So is governance the most important consideration in ESG? European regulators are unconvinced that it is wise to look at ESG risk purely from a profit and loss standpoint. So they created the idea of “double materiality.” The concept of double materiality describes how corporate information can be important both for its implications about a firm’s financial value, and about a firm’s impact on the world at large, particularly with regards to climate change and other environmental impacts. The idea of double materiality comes from a recognition that a company’s impact on the world beyond finance can be material, and therefore worth disclosing, for reasons other than the effect on a firm’s bottom line. When looking at what to prioritize—the E, the S, or the G—the first question to ask is: When looking at what to prioritize—the E, the S, or the G—the first question to ask is: Are we operating under a conventional definition of materiality, or do we buy the idea that double materiality ought to guide our business? This highlights how complex ESG considerations can be.

RiskOp’ unique “inside out” modeling approach to delivering risk quantification, and our scenario planning and maturity assessments help organizations calibrate the effectiveness of their controls in achieving their tactical and strategic objectives by integrating ESG risk into enterprise risk. Companies can use the RiskOp risk modeling and Risk Common Control Framework to establish and map a common framework across risk types, standards, and controls, many of which will relate to ESG. They can also use our frameworks to measure and manage emissions and integrate ESG risk with enterprise risk in near real time, creating a single source of truth using intuitive neuroscience-based dashboard analytics. For more information on risk modeling, visit here. To request a demo, contact us here