ESG in a changing world
getty
The impending return of President-elect Donald Trump to the White House paired with conservative majorities in the House, Senate and Supreme Court leaves the future of many aspects of ESG progress in limbo. Is ESG officially dead or merely in transition? Is it possible to balance innovation and the pursuit of economic growth with protecting the planet?
Building on these topline questions, there are many issues to consider. Did this drive toward reporting and transparency help or hurt the pursuit of more sustainable, responsible and resilient business practices? How can an holistic approach be designed to incorporate broader aspects of material risk to ensure the resilience and sustainability of business operations?
Below are some concrete takeaways to consider.
Engage with multiple ESG stakeholders beyond peers
In order to right size a program in this new environment, understanding and focusing the ESG scope of your organization is critical. That means engaging a broad variety of stakeholders in dialogue about the most material issues. Boards need to be updated on key risks and use that information to govern stakeholder engagement plans. They may also consider meeting periodically with relevant external stakeholders in addition to more common engagements like employee site visits to grow their understanding of issues and risks.
Increasing engagement with stakeholders, particularly representatives from environmental non-profit organizations, may provide valuable insights on climate and nature-related risks or the sentiment of affected community groups. Investing in adaptation initiatives is also crucial, especially for businesses that heavily rely on physical assets, as it serves as a vital risk mitigation strategy. Even if the impacts of climate change are not currently material to the organization, it is advisable to leverage the risk management or business continuity team to monitor emerging global issues, such as climate change, nature and biodiversity loss, technological disruptions from emerging advanced technology, and geopolitical conflicts. Regular updates on these developments are essential for business leaders to stay informed and prepared.
It is also critical to engage with voices expressing reservations to ESG initiatives as there is a viable counterargument to be made. Some of the backlash to ESG is understandable given the weaknesses exposed by ongoing sustainability shortfalls and tradeoffs. SpaceX pulls off a major rocket launch (and return) but with troubling environmental implications—how can conflicting priorities be balanced? Coca-Cola faces additional greenwashing lawsuits—and they are hardly the only major company to be accused of greenwashing or cherry-picking data to hide or highlight. Tesla leads the EV transition but their batteries raise mining challenges—everywhere you look, concerns about sustainability are rising. When these stakeholders have been listened to, it is easier to comprehend their concerns, adjust as necessary and also more effectively plan for the risk of political backlash.
Expand risk assessment to include disruption from growing geopolitical risks
Once stakeholders have been engaged, the information needs to be analyzed and explored for risk prioritization. For example, both domestic political and geopolitical risk are majorly impacting businesses in ways that they are not always prepared to handle. To dig into these issues, I reached out to Frederik Otto, Director Advisory Services at AccountAbility and Senior Fellow at The Sustainability Board, to learn from his insights on the importance of resilience from a business standpoint, especially at this difficult transition point.
Consider that geopolitical risk is increasing worldwide and risk assessments must evolve to include them even if they seem outside of the normal scope of what would be considered. Traditional assessments may gloss over certain facets of political instability or international trade tensions focusing more traditionally on sectoral, internal or regulatory issues. But this scope can be too narrow in an interconnected world that is increasingly fragmenting. Consider the impact of the Russia-Ukraine War on sustainability strategies across Europe or the Houthi attacks on container ships in the Red Sea. Frederik Otto notes that “the impacts of these events have caused significant supply chain disruptions which amplified protectionism as well as near- and friendshoring” and while this may de-risk supply chains, it creates new volatilities like inflation due to price increases of goods and services.
By widening the board’s risk aperture, leaders can gain a more comprehensive understanding of potential impacts on investments and operations. This broader evaluation criteria is essential for anticipating and mitigating risks that could disrupt business continuity and resilience.
Importantly, the risk assessment must not stop at the organization’s edge but include the full lifecycle of key products or services, including suppliers. Geopolitical instability can significantly affect value chains and could jeopardize the viability of key suppliers, many of which are small and mid-sized enterprises in emerging markets, which may have invested less in their resilience. It’s vital to ensure that business operations, whether in urban centers or rural areas, are resilient to major disruptions.
For example, supply chains in politically unstable regions might face interruptions that could jeopardize the financial stability of the entire value chain. Otto explains how “polycrises do not just affect emerging markets, but even developed countries in new and sometimes unexpected ways” such as crime spikes during heatwaves. The data bears this out, as in a 2023 study from John Jay College of Criminal Justice that mentions temperature volatility is significantly associated with the incidence of violence. Upward departures in temperature are associated with increases in robbery and homicide, while downward departures are associated in the opposite direction. Proactively addressing these risks through strategic planning and diversification can help mitigate the worst impacts and secure value chains against risks such as geopolitical and conflict threats.
Accelerate the shift towards sustainable investing despite current ESG challenges
It’s not just companies that need to think through these challenges, but they also need to educate and inform their investors. Current geopolitical situations, marked by unprecedented challenges, reshape how investors assess risks and opportunities. Sustainability and the fight against climate change are reframed as a means of achieving immediate security goals, rather than just a long-term environmental objective. This kind of reframing of the goals can be helpful in designing a future-proofed ESG program for our current times.
The polycrisis has accelerated the shift towards sustainable investing, with global sustainable assets projected to exceed $53 trillion by 2025 and an annual investment of $6.9 trillion needed by 2030 to ensure infrastructure investment is on track to meet the world’s climate goals. While Europe accounts for most of these ESG assets, the US is on track for high growth since 2022.
In this new economic paradigm, where ecological considerations are intrinsically linked to security, the companies aligned with the ecological transition and strategic autonomy may gain easier access to capital. Lenders are increasingly incorporating sustainability criteria into their lending decisions, reflecting regulatory pressure, changing market dynamics and the growing realization that these impacts are financially material especially to manufacturers. This is why a forward-thinking approach is essential and highlights the importance of looking beyond short-term considerations.
Address insurance market challenges
Investors aren’t the only financial stakeholders who need to be engaged – insurers play a key role as well. A comprehensive approach to risk management strengthens organizational resilience against both human-induced and natural threats. Just as wars may impact business strategy and continuity, the increasing frequency and severity of climate-related events, such as floods, rising sea levels, and wildfires, have rendered many areas uninsurable, as we are seeing during this active hurricane season in Florida. Businesses must reassess their risk mitigation and investment strategies considering these developments given that some areas may soon be uninhabitable or subject to managed retreat.
Long-term scenario planning and strategic data modeling becomes indispensable here, allowing businesses to test and refine adaptation plans for various climate-related scenarios so that they can make proactive decisions. This includes evaluating the long-term viability of protecting and insuring assets located in high-risk areas and exploring alternative risk transfer mechanisms to include appropriate insurance coverage, indemnification in contracts, reciprocal agreements within industry, or risk shifting via credit derivatives.
In conclusion, while the ESG acronym is likely on its deathbed, the underlying concepts and questions still pose material risks for organizations that they need to address. Business leaders must adopt a holistic approach to integrating risk and sustainability to build greater organizational resilience in an uncertain and complex operating environment. By doing so, they can ensure that their businesses are prepared for a wide range of potential disruptions including in the face of the growing ESG backlash. Through strategic planning and robust risk mitigation as well as reframing and focusing sustainability strategies around financial material and security concerns, leaders can navigate the complexities of today’s global landscape and secure long-term success.
Thank you to Renata Gladkikh for research support on this article.
