Chapter 1
Risks from ignoring ESG impact on other stakeholders
How can business owners create long-term value for all stakeholders to mitigate ESG risks?
Business owners should ask themselves how their organizations can create long-term value that lasts. Long-term value is created when companies align their goals with society’s goals. This means creating value not just for shareholders, but also for employees, communities, and the planet.
Often, ESG issues arise when companies neglect their impact on these other stakeholders. As people in society increasingly demand greater social responsibility from businesses they work for, buy from, and invest in, ignoring ESG issues would mean exposure to significant risks that ultimately affect the top and bottom lines.
To mitigate these risks, companies should integrate ESG into their operations and business strategy after identifying material ESG risks and opportunities:
- Identify what is material to the company
- Regularly engage internal and external stakeholders to identify key issues of concern
- Assess ESG risks along the value chain
- Map out a universe of issues that are most pertinent to the company, based on what was identified through stakeholder engagement, value chain assessment and industry and standards requirements
- Prioritize ESG risks and opportunities by considering the probability of occurrence over the short to long term and the magnitude of financial, operational and reputational impact
To further distinguish themselves, companies could benchmark their practices against industry ESG leaders, and explore sustainable financing options.
ESG issues often arise when companies neglect their impact on other stakeholders. As society increasingly demands greater social responsibility from businesses, ignoring such issues would mean exposure to significant risks that ultimately affect the top and bottom lines.
Chapter 2
Investor demand for sustainable investments
Can investors do good and still do well?
Research from the 2020 EY Climate Change and Sustainability Services (CCaSS) fifth global institutional investor survey (pdf) suggests that ESG information has never been more important, with the majority of investors surveyed (98%) signalling a move to a more disciplined and rigorous approach to evaluating companies’ nonfinancial performance.
The ESG due diligence process identifies material ESG-related risks and opportunities, and assesses the maturity of target investee companies in managing them. Value is added by providing insights into business-critical ESG risks and opportunities in the short- and long-term, which can be leveraged in deal evaluation, pricing and negotiation.
When incorporating ESG factors into the construction of their investment portfolio, investors have several strategies to choose from. These strategies are not mutually exclusive and are typically used in combination with one another. The choice of strategy is often dependent on the investor’s impact intentions as well as financial and non-financial objectives.
Sustainable investing typically takes a few forms — ESG incorporation, sustainability-themed investing, and active ownership. After an investment has been made, active monitoring — particularly on material ESG topics — will help companies to continue mitigating risks and identifying opportunities. Post-investment, investors should continue to monitor ESG performance of investees and the investees’ competitors to be able to constructively engage with them. Besides monitoring the ESG performance and practices of investees, monitoring the quantifiable risk impact on the investment portfolio is also helpful.
Chapter 3
Family enterprises and philanthropy
How can family enterprises make a positive ESG impact through philanthropy?
There is a direct correlation between families’ personal involvement in evaluating philanthropic progress and their overall interest in effective giving, and owners of smaller and larger family enterprises generally believe that personal oversight contributes to effectiveness.
Where there is a desire to either institutionalize the family’s philanthropic efforts or reduce personal involvement for individual family members, professional mechanisms, such as family offices, may be a means of helping or providing support.
Philanthropy makes a beneficial social or environmental impact if it is effective and the effectiveness is carefully measured and evaluated.
Summary
Stakeholders’ interest in environmental, social and governance (ESG) issues has grown. Companies need to integrate ESG into their operations and business strategy to mitigate ESG risks.
Investors seeking strong financial returns, while wanting to do good at the same time, should embrace sustainable investing and consider firm performance on material ESG issues.
Philanthropy makes a beneficial social or environmental impact if it is effective and the effectiveness is carefully measured and evaluated.