Why ESG Will Move Up on the Risk Management Agenda Next Year

17 January 2022 10:30

ESG risk management

The concept that a company’s profits should not come at the expense of the environment or people - or as a result of unethical business practices—has been around for centuries. In the late 1800s, for example, religious organizations began investing in the stock market, but shunned investments in the weapons manufacturing sector.

What’s different today? The scattershot efforts of the past coalesced into clear principles to :

  • UN Guiding Principles on Business and Human Rights: In June 2011, the United Nations Human Rights Council endorsed three principles to encourage nations and business entities to engage in practices that foster human rights and protect fundamental freedoms. In addition to encouraging nations to establish laws and effective remedies when those laws are broken, the Guiding Principles addresses the need for all business enterprises, regardless of size or sector, to implement appropriate risk management practices.
  • UN Sustainable Development Goals (SDGs) : Adopted in 2015, the 17 SDGs a “shared blueprint for peace and prosperity for people and the planet, now and into the future.” Modern ESG principles align with these aims —"E" factors like affordable, clean energy and climate action on land and sea; "S" factors ranging from ending poverty and hunger to enabling education and decent work for all; "G" factors, such as responsible production and peace, justice and strong institutions.
  • OECD Due Diligence Guidance for Responsible Business Conduct: Published by the Organisation for Economic Co-operation and Development in 2018, the OECD Guidance recommends due diligence to identify, prevent or mitigate adverse ESG impacts of business investments.

To date, the primary focus for ESG concentrated on ethical and sustainable investment. The above guidance and goals, however, form the basis for best practices and legislation under consideration worldwide, particularly in the EU. As ESG rises to prominence beyond the realm of  financial advisors, venture capitalists and institutional or individual investors , organisations worldwide will experience increased pressure to integrate ESG into third party risk management .

2 Reasons to Integrate ESG in Your Supplier Due Diligence

The term ‘ESG’ was already earning more media attention and growing consumer awareness prior to 2020. COVID-19, however, heightened visibility as the global pandemic pushed supply chain sustainability and social issues into headlines and across social media. As ESG gained traction, risks companies face have expanded.

  • Reputational risk: Consumer activism added to the speed of digital communications equals more potential for PR problems. If a company is viewed as falling short on ESG commitments, for example, it only takes hours for a single tweet to turn into a torrent of negative news, calls for boycotts and in some cases, investor revolts. When allegations surfaced that garment workers at a UK factory were being paid less than minimum wage, the adverse media coverage contributed to a £1bn drop in the online fashion retailer’s value.

Regulatory risk: While many of the ESG standards and best practices are not mandatory, governments are getting involved as well. The EU is leading the charge, where there are currently 245 voluntary or mandatory ESG reporting requirements in place. This includes the Mandatory Human Rights, Environmental and Good Governance Due Diligence Directive adopted in March 2021. When the law goes into effect, likely in 2022, EU member states will be integrating the Directive in national legislation to ensure that large companies, publicly-listed or high-risk SMEs and financial services organisations operate ethically and expand supplier due diligence to mitigate “potential or actual adverse impacts on human rights, the environment and good governance across their value chain.” Several US government agencies have also made similar moves and ESG appears to be a top of mind issue among legislators as well.

Increased regulation makes it more even more critical to optimise third party risk management processes for greater transparency across the entire supply chain. But by taking steps to solidify supplier due diligence  and ongoing risk monitoring , organisations gain strategic benefits. Instead of just talking the talk and ticking boxes, a robust programme reduces potential regulatory risk exposure while also building trust with investors and consumers which contributes to value over the long term.

How Can Organisations Implement Effective Third Party Risk Management?

Having the right data at your fingertips makes staying on top of ESG risk easier. That’s where Nexis Solutions can help. Risk mitigation platforms like Nexis Diligence™ and Nexis® Entity Insight  empower organisations to conduct risk-aligned due diligence and third-party monitoring across a world-leading collection of news, company, legal and regulatory data —from global, regional, national and local sources. In addition to this valuable content, the underlying search and filtering technologies allow organisations to customise key terms and other parameters to suit their unique risk considerations. Want to bring data into your own applications? With the flexible API and dataset options available from Nexis® Data as a Service , organisations can quickly automate adverse media screening to stay alert to emerging ESG issues.

Check out more facts about ESG and risk mitigation here.

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