An economic downturn will be inevitable after COVID-19. How can organisations weather this storm? Having strong ESG risk-management practices is key.
Sustainability during the 2008 recession
While many assumed the sustainability ‘trend’ would be shelved in the last recession, it was quite the opposite. A need to cut business costs created a mindset shift towards operational and resource efficiency that put sustainability centre stage in the recovery. Businesses that managed a much wider range of environmental, social and governance (ESG) risks were more resilient, and more capable of responding to rapidly changing market conditions. Companies quickly realised that focusing solely on financial value creation for shareholders was not enough to protect against the effects of the downturn. Leading with purpose and values, that extend beyond the financial and consider wider societal values, is now a key component in any business growth strategy. It was only through a complete collapse of the financial system that we were able to realise the true importance of sustainability impacts on long-term value creation of business in society.
ESG and risk management is critical
According to the World Economic Forum (WEF) Global Risk Report 2020, the top five global risks in terms of likelihood are all environmental, including: extreme weather events, climate action failure, natural disasters, biodiversity loss and human-made environmental disasters. Understanding that another recession is upon us, every business should be critically factoring ESG risks into its risk-management function. There needs to be a recognition of the interconnectedness of environmental, social and economic risks, as a failure to do so could result in material business impacts including profit-loss, operational impacts and potentially losing social licence to operate. It’s imperative that ESG is not seen to be separate to the business but integrated and connected in how a company generates long-term, inclusive growth for its shareholders. Strong ESG risk-management practices include:
- Governance structures for sustainability, ensuring management is responsible for sustainability risk, with the right skillset, knowledge and expertise in the business to appropriately manage this risk;
- Identification, assessment and management of risk to protect and create value; and
- Reporting publicly on the policies, practices and performance relating to sustainability risk management.
Investors demand information relating to ESG factors
In the EY 2018 Global Climate Change and Sustainability Services study of over 200 institutional investors, there was global consensus that ESG information is now critical to investor decision-making, and assessment of long-term value creation.