More companies are bringing sustainability practices to the forefront in the face of climate change. One of these practices is the ESG (Environmental, Social, Governance) framework that measures the sustainable and societal impact of an investment in a company or business. This risk management technique considers the environmental, social, and governance issues facing a company and assigns a weight to them so that they can be scored individually or collectively to determine the risk value. The main objective in utilizing this risk management practice is to analyze the non-financial risk value for the company.
In order to further understand the pillars of this framework, it helps to break the three components down into examples of possible risk factors within your company. The following are common examples used within the ESG model:
- Environmental Responsibility: Can include issues related to climate change, energy and extractive resources, waste and water management, flora & fauna, and deforestation.
- Social Responsibility: Issues including human rights, gender and diversity, community relations, and product liability.
- Governance: Includes compliance, business ethics, and procedures.
Incorporating the ESG framework allows for you to shift from a more compliance-based mindset into a proactive, forward-thinking approach. ESG data provides companies with risk management feedback, so that an effective compliance based, risk management strategy can be developed. This way, possible threats can be addressed before they occur. Common questions that companies may ask themselves when considering ESG criteria include:
- How does your company handle material risks?
- Which ESG issues fall under the financial material for your company?
- How do these risks affect company value and growth?
Utilizing an ESG framework can only help in furthering the success, productivity, and performance of your company for years to come. Ensure that your company is fully equipped to tackle the possible impacts of an ever-changing climate and industry by considering the incorporation of the ESG model today.
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