Exclusive: How to use ESG factors as a competitive advantage

In the Global Risk Report 2021 published by the World Economic Forum environmental risks ranked high on the risk perception survey. “Extreme weather conditions” was in the top three “Clear and present dangers” up there with cybersecurity concerns and “biodiversity loss” was up there with “state collapse” in the “existential threats” section.

Respondents in the Global Risks Report said that they expected an increase in “economic confrontations” in the coming years, a development closely followed by “polarization of domestic politics”, “extreme heat waves” and “destruction of natural ecosystems”.

Correct risk management must integrate cyber risk and ESG (Environmental, Social and Governance) factors in order to have a holistic approach and increase the resilience of the business to changes in the ecosystem in which it has incidence.

ESG factors used to be on the backburner of risk assessments since they were seen as long term risks and with little impact on the bottom line, but the rapid acceleration of technological, political and cultural change has put ESG factors on the decision table, probably for good. After a considerable increase in cyber-attacks and changes in the sociopolitical landscape due to the pandemic, the US Securities and Exchange Commission is considering rules requiring ESG disclosures for public companies. NASDAQ has proposed requiring its listed companies to disclose corporate board diversity statistics.

The pandemic has highlighted how crucial human capital is for the value chain and the social and environmental factors to which they are most vulnerable. As I always say, the same risk factors that affect companies also affect the corporate community.

Environmental, Social and Governance Factors (ESG) are those that determine how an organisation is managed and what is the impact that it has on its context, as well as its ability to face a rapidly-changing situation and use them as competitive advantages.

Environmental factors (E) analyse the contribution and performance of a business in terms of environmental challenges.

The social factor (S) must take into account the impact that the activities carried out by the company have on its corporate community, for example, in terms of diversity, human rights or healthcare.

And the governance factor (G) studies the impact that shareholders and management have on their corporate community.

At the heart of ESG criteria is the simple idea that companies are more likely to be successful if they create value for all their stakeholders – employees, customers, suppliers and society in general, including the environment – and not just for the company.

The generation that in a few years will dominate the labour and consumer market, the millennials or “the generation of values” tends to evaluate the ethical and sustainable behaviour of the companies for which they work for and the products they consume.

In a rapidly-evolving and ever-increasing context of uncertainty the only constant is change. If you adapt to change faster than your competitor, you win. Same as it is in nature. What we are seeing is a shift from the cold-blooded free market capitalism to a more value-based market.

So, the question is, how can I prepare my company to identify, control and integrate these risks in order to create a competitive advantage?

In the first place, companies must carry out a preliminary study of the materiality of the impacts in the medium and long term that environmental and social factors may have in their value and production chains in order to achieve competitive advantages within their market.

Second, conducting an assessment of potential ESG risks helps companies anticipate and avoid hazards. This process must begin with the boards of directors, whose role in periodically supervising these risks, especially those associated with governance, is essential.

An ESG risk analysis evaluates elements such as good governance, ethics, fiscal responsibility or transparency of a company. The management model of a company must focus on the decision-making process of companies in the medium and long term, so that they can create value for their stakeholders and not only solve specific problems in the short term.

Of course, all of the above will not make sense if the main objective of ESG risk analysis and management is not put into perspective and remembered: to improve the impact of the business on society. Companies committed to sustainability are better prepared to face risks, produce great economic value and improve life for their corporate community. And only then, with bold decisions and strategic plans in which ‘sustainability’ is much more than a buzzword, can we contribute to a better future for all.

By Peter Backman

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