The unifying phrase behind all types of ESG vulnerability is “externalising cost and risk”. Broadly this is when inputs are used unsustainably (the rate of use and replacement means that they will run–out in a measurably short time), or when the outputs and waste carry costs which do not fall on the business but on the public purse, or they create problems that need remediating action. Either way, investors, government and popular opinion increasingly see this as unacceptable. At worse, it is perceived and increasingly regulated as a form of false accounting.
There are a raft of environmental concerns that relate to habitat destruction, pollution, unsustainable use of natural resources including not replacing renewable resources, and destructive waste disposal. There are particular issues such as greenhouse gas emissions, disposal of plastics, and contaminating waste and by-products (such as draining from mines) but risk comes from the increasingly recognised and recorded that describe the company’s relationship with ecosystems, and the life time impact on the ecological system of that relationship.
These issues range around employment practice and labour, human rights of workers, local communities and dependants, corruption, undertaking activity that produces financial support and legitimacy for repressive regimes and involvement of organised crime. Societal risk can also include not becoming involved and positively participating in the development of a community, which gives businesses a licence to operate. Discrimination against protected characteristics, especially when there is a legal gap between a company’s source and market nations (for instance on attitudes to same sex relationships).
An area that has grown in concern since the financial crises of 2008. Failure to observe increasingly articulated norms and best practice behaviour in the management, accountability and transparency of a company’s operation and leadership can attract attention and result in serious reputational damage.
Sustainable Development Goals
The Sustainable Development Goals were launched by the UN in 2015. There are 187 targets underpinning these goals. The SDGs have two crucial features; they are universal and every country is challenged to achieve all of them by 2030 – none is on target to do so, even the most developed. The SDGs also clearly articulate the action expected from business and there is increasing market and political pressure of businesses to set their own targets for contributing to the goals, and to report regularly on progress.
The three aspects of ESG assessment and the SDGs overlap significantly. The advantage is that resolving one ESG vulnerability can have positive impacts on the other two. However, problems can occur when perverse pressures are applied to resolve one aspect’s vulnerability to result only in a negative impact on another. This is particularly problematic when a company seeks to gain high accreditation with a single issue scheme that it considers to have a major impact on its market.
Upstream and Downstream Vulnerability
There is decreasing regulatory and public tolerance of ESG failings upstream or downstream of a company. Reputations can be damaged as much by the failure of upstream supplier to adhere to a company’s public ESG strategy or by the misuse of its products downstream, as can result from failures in its own operations. At best ignoring or not examining these upstream and downstream effects can be perceived as externalising and so avoiding a legitimate cost.