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By Tomorrow.io
Feb 10, 2022· 4 min, 48 sec

What Are ESG Risks?

What Are ESG Risks?

Sustainability initiatives are top-of-mind for nearly every high-performing business. Yet, the pace of global warming and climate change as a whole continues to accelerate.

It is the year 2022; surely there are strategies implemented in this day and age to prevent the world from imploding from a lack of drinkable water, or clean air to breathe. Who is there to stop various companies from stretching the environment and society beyond the limits?

The good news is, something is being done, and that something is known as ESG Sustainable Investing. How can investing in something be beneficial to the state of our world? We’re glad you asked…

ESG Explained

ESG stands for Environmental, Social, and Governance. In terms of investing, it is all the risks companies face by not conducting sustainable business practices. It is a financial term used by investors, and it helps to determine what the most successful and sustainable investment to make would be.

To put it into perspective, an investor who wishes to make a responsible investment would look at various companies and corporations and make their decision according to the ESG criteria the company abides by.

There are a few ESG factors that will influence the decision of smart investors looking for viably sustainable options. There are environmental factors, social implications, and issues of governance to consider before diving into such a venture.

ESG Risks on the Environment

In terms of the environment, the ESG risks are the negative impacts that a certain company can have on the environment. This includes how they dispose of waste, whether or not they use renewable resources that emit fewer emissions, how efficiently they use energy, how much deforestation takes place, and if it applies, what animal welfare protection policies they have.

There are many companies that are buying and selling land all over the world, including within the Amazon rainforest. This part of the earth is known as the ‘lungs of the world,’ because of the high amounts of emissions that are sucked up by the trees to be made into oxygen.

In the past there was no saying what these companies did, nor was there much of a concern. Now we have started to wake up, and we have realized the implications that mass-deforestation has on the absorption of C02 and other greenhouse gases.

ESG Social Risks

The ESG risks involving social implications is determined by what business the company revolves around and how that affects their employees, as well as the rest of society. ESG social factors will include determining what kind of relationship a company has with its surrounding communities, how fairly the employees are treated, how appropriate the wages are in terms of hours worked, and whether or not the company has inclusion policies to prevent any discrimination from happening amongst co-workers.

Without a good report between the community and the company, the investors will see it almost as if there is no consent from the community for the business to run. A community might report a health risk that the company might ignore, and thus, a bad relationship between the two is formed.

Ideally, the company should take into consideration the community’s report, and investigate the surrounding problems that were highlighted, and finally they should implement strategies to fix the issues and maintain the good relationship.

ESG Risks in Governance

ESG risks when it comes to governance is referring to how the company is run. This means the corporate side of the companies, not the general employees who make the business function, but the people who make all the decisions.

It is easy to forget the governance factors because we get so caught up in the environmental and social concerns of how a business is run. But governance is like the root of the business, because they make the various policies that affect the employees and the environment.

Governance pertains to the shareholders and how their rights are protected, whether or not the interests of the board of directors and the shareholders are in line with the management of the company, and the level of transparency they work with.

Reporting ESG Strategies

We could not stress the importance more of being transparent with the ESG requirements and expectations. If you want your company to grow responsibly, investors will make sure that happens, so long as you have made your plans to run your business sustainably apparent.

In order to lure investors in, you need to make a report that clearly states the company’s plans to become more sustainable, and how they will maintain that. If you think you can simply give the ESG standards a miss, you are sorely mistaken, and your business will lag behind the rest.

ESG Investments Facilitate Growth

It is needless to say how an investment can help your company grow, so it would be at the interest of every business to be upfront and honest with the plans they have in place to remain with the ESG expectations and requirements.

More and more investors are wanting to make smarter decisions with their investments to ensure their sustainability. This means that more and more companies are starting to conduct business in a way that is not so detrimental to the health of our communities, and surrounding environments.

This is exactly the initiative that all investors should make. The state of the world is at stake, and the ESG criteria have made it possible for people to make a change by investing in companies that are sustainable environmentally, socially, and run with fair governance in the hopes to filter out the companies that pose a threat to our futures.

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