What are the risks of ignoring ESG practices?

Real ESG risks are not regulatory risks, they are business risks. A business that doesn't manage its resource consumption efficiently, it's human capital properly, it's customers responsibly, and doesn't have a transparent and accountable governance won't only fail from an ESG perspective, but will likely fail as a competitive and a viable business.

Esma statistics show that sustainable UCITs are constantly better performing than their peers. So what is the risk in not considering ESG and impact aspects? As an investor you make less money! As simple as this.

Sustainability and ESG considerations are rewiring the business world. One aspect of ESG is the concept of "internalizing externalities" via regulatory. Examples could include 1. Carbon pricing: increase in costs to corporates 2. Permitting delays: lower revenue growth 3. Fines: increase in costs Over the longer term, the competitive landscape in each industry could shift. Leaders on financially material Sustainability issues could emerge stronger

ESG is not just a factor of compliance. Considering the present scenario and future aspects, it will affects overall performance of a company. For instance, first it willattract the financial risk, financial risk direct create the governance and operational risk as well. Simultaneously, reputations risk will be added, and eventually marketing risk will appear and that makes the cycle of risks repeatative.

Multiple regulatory risks arise of not following ESG practices. In india BRSR reporting and in USA material risks which include ESG. The chances of facing Regulatory risks are higher with the advent of NGOs and other stakeholders understanding risks and filing suits. If not managed well , the company may not only face fines but may have to shut shop completely.

Failure to incorporate ESG risks into frameworks and practices can lead to financial risk in a variety of ways. Financial risk (Credit risk, liquidity risk, market risk) impacts can come from loss of assets, impacts to supply chain, damage in infrastructure, social pressures, green washing leading to fines, sudden surge in commodity prices due to unavailability etc. There are many examples.

Companies that choose to ignore sustainability definitely put themselves at risk financially. It has become clear that investors are now closely looking into firms’ ESG performances so it would become harder to raise funds. Besides, customers are also taking a stance and gradually demanding more sustainable products so ignoring this may lead to losing market shares to more sustainable competitors.

Companies disregarding ESG factors may face financial risks such as reduced access to capital or increased borrowing costs. Investors and financial institutions increasingly consider ESG performance in their decision-making. Ignoring ESG may lead to decreased investor confidence and limited access to funding options.

On one hand there are trillions pledged by investors towards sustainable companies and on the other hand all investors are scared of issues arising out of non compliance leading to losses and law suits. So it’s a double whammy when it comes to financial risks. Not only will u face fines but u will lose share holder value and even stand the chance of losing vendors and customers. So the financial risk is not only in terms of fines and penalties but an overarching Damascus sword.

Financial risks arise when ESG practices are overlooked. Investors, customers, and financial institutions are showing a growing preference for businesses with strong sustainability and ethical standards. Ignoring these practices can impact your company's financial health, affecting investments, market value, and access to capital.

A company in the manufacturing industry can reduce its operating costs and dependence on suppliers by adopting energy-efficient technologies and optimizing its production processes to use fewer inputs and materials. This increased efficiency can make the company less vulnerable to price volatility, while also helping it comply with environmental regulations and avoid fines. Efficient resource management can strengthen the company's operational resilience and reduce the risk of disruptions.

Operational risk resulting from ignoring ESG practices can be significant. Physical risks will can result in property damage, business interruption, supply chain issues etc. Transition risk can lead to people risk whereby climate transition can result in in adequately trained staff. Also, transition can lead to stranded assets which no longer have any value.

Ignoring or paying less attention to ESG practicies actaully lead to costly delays arising from the need to respond to effects, suspensions by authorities or financiers. There are cases where Managers especially in frastructure Projects rush to complete technical designs and commence works, with ESG factors considered as a stumbling block, causing unnecessary delays, only to face far greater and costly constraints arising from nonconformity with standards. Failure to address workers welfare and rights leading to demoralisation of workers, strikes,etc gives rise to operational inefficiency and low productivity. It is therefore more beneficial to integrate ESG into organisational operations or programs and project design and implementation.

Ignoring ESG practices in business is like ignoring the warning lights on your car's dashboard :) It can lead to operational hiccups and breakdowns in your supply chain. Think of climate change causing unexpected storms or droughts, disrupting how and where you get your materials. Or social issues sparking labor disputes and community unrest, like a roadblock in your daily operations. To avoid these bumps in the road, it's smart to adopt ESG practices that make your business more robust and efficient. I believe by doing so, you're not just fixing potential problems before they arise; you're also building a smoother, more sustainable path for your business's journey.

Ignoring ESG practices can lead to rising operating costs and vulnerability. By emplacing sustainability and ESG frameworks at the beginning of each ops process, companies can reduce operational expenditures such as raw materials, supply chain. Additionally, instilling ESG practices can help a company improve it's resiliency as climate change continues to impact business continuity.

Reputational risk here results from social, industry and potentially regulatory action as a consequence of not embracing ESG initiatives or practices, but more likely as a result of making false promises and misrepresenting claims at best or being deceitful at worst.

I have noticed that those who don't want to spend time tackling ESG and environmental sustainability assessments and certifications start losing new RFPs. And, at customer renewal time, these ESG questions are beginning to pop up. So, they are risking losing existing clients as well by not having data and policies to share regarding emissions, carbon, environmental issues, diversity, human rights, and governance.

I don't think consumers are particular about a company's ESG practices. An example is Bud Light whose marketing campaign led by DEI backfired and sales plummeted. I think reputational damage comes more from non-compliance on regulations and where a company can lack behind its peers. Definitely a risk of losing institutional investors.

However ill-advised, lack of interest for ESG or sustainability still exists. But ignorance cannot be pleaded anymore. Scientific evidence is here to last. Additional regulations like the EU Corporate Sustainability Due Diligence Directive (CSDD) shall help further reduce resistance to real sustainability pivot… And for those not mature enough, more and more researchers, NGOs or the society at large come early on to spot greenwashing and malpractices, with immediate impact on a company reputation.

Ignoring ESG practices poses a significant risk of damaging a company's reputation and brand value among customers and the public. As consumers increasingly prioritise ethical, sustainable, and socially responsible products and services, they scrutinise companies' ESG performance and impact. Companies failing to meet these expectations risk losing customer loyalty, facing boycotts, and tarnishing their brand image. To mitigate this risk, businesses must align ESG practices with their brand identity and values. Clear, authentic and honest communication of these practices to customers and the public is crucial in maintaining trust and safeguarding reputation. Be transparent and honest in your communication to prevent greenwashing.

Integrating innovation methodologies with ESG opens doors to new market opportunities focused on users and communities that enable the company's long-term growth and sustainability.

Ignoring ESG practices can make businesses miss out on innovation and growth opportunities. As ESG issues create new market needs, companies overlooking these aspects risk losing their competitive edge. Embracing ESG, however, can lead to innovative products and services that meet evolving environmental and social demands. To stay ahead, businesses should integrate ESG into their strategies, turning challenges into opportunities for growth and leadership in an increasingly conscientious market.

Although less than 20 percent of CEOs mentioned ESG as a source of innovation : it’s still a risk. Companies looking for cleaner greener simpler alternatives will have a first mover advantage when the law becomes stricter. And it will. Companies looking to innovate and refocus on adding value through innovation will emerge winners in the race for sustainability.

Innovation and new technologies are helpful for increasing the efficiency and quality of services and products. This will make consumers more comfortable with the products. They will choose the products as best and keep purchasing. This will be helpful to decrease the loss of economy and to avoid the risks associated with their business. Actually this is like a mutulism. Because company can increase the production and business expansion based on the increasing customers and purchase. The consumers are also get good result from the products.

In India’s MSME context, I believe E&S are more relevant at this stage as their prosperity is triggered mostly through Bottom up approach. ‘G’ is still a subject falling under regulatory compliances and voluntary adoption of good governance will take some time. There is a big share of artisans as Micro enterprises. Collectively Indian Handicraft Industry (ex. Moradabad, Ferozpur etc) has an attractive export market. E&S aspects are making it challenging for them who use traditional methods like using Coal in small furnaces, involve family including women n kids in mfg etc. Hope the world provides them feasible solutions n support instead start calculating carbon footprints of their artefacts/ handicrafts.

The most dangerous risk of ignoring ESG is that with a weak Governance there is no risk management in the company. The G in ESG is the base that allows a company to ensure E and S risk management, and even more so Financial Risk and other strategic concerns. If you analyse all environmental, social and financial scandals they have a common root: something went wrong on the G.

A company ignoring ESG practices can loose access to capital, cost of capital will increase and also impact the market, going further. Implementation of CBAM and many large corporates taking scope 3, value chain emission reduction measures, human rights due diligence and other environmental, social assessments and certification will only increase the greenium further. A company with market /sector leading ESG practices and ratings will be able to a command premium.

Ignoring Environmental, Social, and Governance (ESG) practices can pose various risks. Environmentally, neglecting sustainability may lead to environmental degradation, regulatory fines, and increased operational costs. Socially, poor treatment of employees or communities can harm a company's reputation, leading to customer and investor distrust. Governance lapses may result in legal issues, financial mismanagement, and diminished shareholder value. Embracing ESG practices is increasingly important for long-term resilience and positive stakeholder relationships.

Ignoring ESG practices means ignoring potential opportunities for business growth &value creation. Companies that don't adopt ESG practices will fall behind by not listening to changing market trends, and will fail just like "Kodak" failed by not being able to innovate in the era of digital photography, while competitors went further ahead. Another risk can be reputaional. As stakeholders expectations rise that companies be more sustainable, those who fail will lose stakeholder trust & confidence. Regulatory risk is another risk affecting businesses that are not prepared, risking huge fines, or lawsuits. All in all, the cost & risk of not adopting sustainability is so much higher than merely saying "Sustainability is costly."

Investors increasingly prioritize ESG criteria, making it hard for companies with poor ESG practices to attract investment. Investment funds using ESG as a screening tool may exclude companies with low ESG scores, limiting their investor pool. Credit ratings now often consider ESG factors, so poor ESG practices can lower ratings and increase financing costs. Additionally, regulations in some areas favor ESG-compliant companies, so ignoring ESG can result in missed incentives and higher capital costs.