The environmental, social, and governance (ESG) has acquired prominence in less time. Many stakeholders, regulators, businesses, ESG investors, and governments are greatly interested in it. There is a huge economic, emotional, and political impact on humankind. There are so many ESG risks and opportunities associated with climate-related issues.
The climate-related issues had a huge impact on the ESG revolution. We will learn more about sustainable investing for investors, the impact of climate-related risks on companies, challenges and opportunities associated with ESG, and risk management.
What Is ESG?
Environmental, social, and governance (ESG) is a measurement of the sustainability of a company and its commitment to environmental, social, and governance investment standards. ESG is a set of standards that investors find as a good investment. ESG scores are calculated based on ESG factors like employee satisfaction, energy use, business ethic standards, executive pay, carbon emissions, climate change impact, etc.
ESG can identify good companies and companies likely to face challenges due to increasing and changing regulatory demographics, environmental and technological trends, etc.
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Climate Change: One of The Important Factors of ESG
As per S&P Global Market Intelligence, approximately 80% of the world’s prominent companies are exposed to market and physical transition associated with climate change. Physical climate change risks could involve exposure to unpredictable, severe weather events or wider climatic changes. For example, some companies own assets with a greater risk of exposure to rising temperatures and sea levels. Transition risks are exposure to economic, regulatory, or similar consequences due to the transition to a low-carbon economy, like some companies selling or needing carbon-intensive fuels that might become more pricy as regulators intend to impose a price on carbon.
Many ESG efforts have been taken in response to these risks. Sustainability Accounting Standard boards feature a company’s emission of greenhouse gases as a sustainability problem that is probably material for more than 50% of the industries during the transportation, extractives, and mineral processing sectors.
ESG Risks and Regulations
Unsurprisingly, due to the potential effect of physical or transitional-related risks on several companies, few climate change assessment standards are codified as legal needs. It is happening due to both regulations and contracts. For example, the UK Chancellor of the Exchequer states that companies must refine their climate risk reporting for reporting periods starting in January 2021, with much wider climate change disclosure rules expected to be executed by 2025.
In Canada, the Ontario Security Commission (OSC) published guidance regarding climate change disclosure and participated in the Capital Markets Modernization Task Force Report released in January 2021. The Superintendent of Financial Institutions (OSFI) office is consulting federally-regulated financial institutions and pension plans about prudential tools and supervisory approaches to address climate-related risks.
Lenders and other parties need their contract counterparties to create climate change-related disclosures as regulatory developments persist.
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Benefits Of ESG
Let us study some benefits of ESG.
- Companies that practice good ESG can deliver sustainable returns in the long term and reduce the risk of financial penalties.
- Evidence shows that companies with high ESG scores have higher returns and lower volatility.
- Businesses following ESG have better odds of hiring recruits and retention.
- Institutional investors, pension funds & social trading seek financial stability and consider ESG scores while making investment decisions.
- Analysis shows that more than 60% of institutional investors look at ESG ratings at least once per week, and companies with high ESG ratings gain 15% more sustainable investments.
- ESG metrics may impact the profits and reputation of a company and can demonstrate a lack of preparation for potential exposition to regulatory action.
- Good ESG scores can convert to a 10% lower cost of capital due to the effects of risk on the organization regarding its operating license.
Challenges Of ESG
Let us study some challenges associated with ESG.
- Not many ESG factors are quantifiable, and converting them to earnings growth or high performance is difficult for the firm.
- Not many companies disclose ESG data and measurements, so that methods may differ. Hence comparison between firms can be challenging even for the same metrics.
- Converting ESG strategies to the organization’s ecosystem and long-term sustainability business value.
- Embedding ESG to current risk practices of businesses.
Challenges And Opportunities
Due to the climatic change associated with rising sea levels, increasing temperatures, and other changes, the factors of human civilization have an impact. Fortunately, from common individuals to businesses and governments, capital markets, lenders, and financial institutions have promisingly taken actions to course-correct.
One hundred ninety-seven countries have signed the Paris Agreement to fight global warming. It aims to reduce carbon emissions so the global average temperature doesn’t rise more than 1.5 degrees Celsius. Many companies and governments are committed to reaching net-zero emissions by 2050. With the growing need to minimize emissions and reduce the environmental effect on their products and services, high demand for sustainable infrastructure creates new investment and business opportunities.
Conclusion
We have learned the impacts of climatic change on ESG and various factors that impact a company’s growth. LOCOMeX’s best ESG and Sustainability Management Software provides data for scope 3 emission reporting and auditable investment-grade ESG produced at the project level within supply and value chains. Switch to LOCOMeX to know more.
