What Your Company Should Know About High Impact ESG Issues

All organizations, regardless of the size or industry, are prone to non-financial factors that can negatively impact their business. The effects of environmental, social, and governance (ESG) issues on a company’s business are of growing concern for investors, consumers, governments, and other stakeholders. Most companies are prone to a wide range of ESG issues, so it’s imperative to figure out which are most material and learn how they affect your business.?

In this article, we’ll study the concept of materiality and take an in-depth look at a set of ESG issues found to be financially material for sectors with high ESG risk. We’ll also explore ways and methods with which organizations can tackle these issues effectively. The inability to know which issues are material can lead to incompetent management of those issues and ultimately harm an organization's operations, employee retention rate, and financial track record.

Figuring Out Which ESG Issues Are Material to Your Company

What is considered material will differ depending on the sector a company operates in and its business model. That’s why conducting an ESG materiality assessment is a crucial first step when trying to understand where to focus company attention and resources. In order for your company to manage ESG obstacles, you need to first figure out which issues are material to you and your stakeholders, and then understand the best practices for managing these risks while running your company.?

High-Impact ESG Issues Are a Common Thread Across Industries

In a recent study of industries with the highest average ESG Risk Rating scores, several issues were found to be material for organizations across the five highest-risk sectors. These issues can shape the overall ESG risk profiles for organizations across industries of all sorts. Organizations in the five highest-risk industries are likely to have high exposure to these ESG issues and the related risks.?

Business Ethics:?Organizations involved in legal misconduct face potential negative monetary consequences and can suffer severe reputational risks that can change their operational perception and branding. To help avoid these negative outcomes, companies need to build an ethical culture supported by programs, procedures, and governance.?

Product Governance:?It’s crucial that organizations make sure the quality and safety of their products and services and manage their responsibilities to clients. Failure to do so can pave the way to reputational, legal, and regulatory risks.

Community Relations:?Building open and transparent community relations is important for organizations to keep up their social license to function. Companies face pressure to reduce their environmental impacts in the societies where they operate and to provide support for sustainable local development. Poor societal relations could lead to community opposition and can result in production interruptions and lost revenues.?

Carbon – Own Operations and Products and Services:?Organizations need to control their carbon risk and stick to low-carbon business models or they will face an increased regulatory burden and the operational costs associated with it. Greenhouse gas (GHG) emissions reduction targets, including net-zero and science-based targets, are being used by companies in heavy-emitting sectors to help reduce their carbon impact and associated risks.??

Emissions, Effluents, and Waste:?This remains a key concern across sectors and stakeholder groups, especially with the trend toward stronger, broader regulations and greater enforcement. Companies need to make concerted efforts to ensure they are managing emissions, effluents, and waste to avoid being penalized for environmental pollution.

Resource Use:?The use of water as a resource has been a focus for many industries for decades. The over-extraction of limited clean water resources can cause people within regions to be displaced, and lead to potential conflicts within and among regions and nations. Thus, for industries that overuse water, responsible water use is crucial to maintain operations as well as to maintain healthy stakeholder relations.?

Occupational Health and Safety:?Ensuring and maintaining a safe and healthy work environment is crucial for any company, whether their employees are stocking shelves, helping patients, or operating heavy machinery. Businesses need to ensure they manage the elements of workplace health and safety that they can control to minimize operational disruption and other negative impacts.

Key Actions to Effectively Manage Material ESG Issues

How companies address specific material ESG issues will depend on their operating environment, their resources, and the MEI in question. There are, however, some common action-steps all organizations across the world can take to identify and effectively manage MEIs in their business:

• Invest in learning and studying industry best practices and practices from leading peers related to ESG issues.
• Understand your company’s starting point with respect to its MEIs and establish a benchmark for your key performance indicators. Then, where applicable, set ambitious and relevant targets for improvements (e.g., science-based target initiative).
• Establish board-level oversight of the most impactful MEIs for your business and your stakeholders.?
• Create relevant ESG policies and programs and seek external certification (e.g., ISO Certification).
• Leverage sustainable finance instruments (such as green, social, or sustainability bonds) to fund the development of assets and projects with positive environmental and social benefits.
• Consistently disclose the related ESG strategies and progress against targets during annual CSR, ESG, or integrated reports.