Which is the biggest risk to business: Climate change, ESG or Sustainability?
The terms can be confusing, exacerbated by overlapping usage.
What do they mean in plain terms? ESG refers to environmental, social and governance principles, as most of us know. Social includes matters such as labor disputes, product liability, shifting regulations and demographics, among others. Governance includes diversity issues, oversight of corporate risks, strategic directions and growth opportunity maximization. Sustainability refers to ESG generally.
The “E” in ESG includes climate change, among other environmental risks such as toxic releases. Climate change, most would contend, is the greatest risk at the macro-level for our planet and brings risks to corporate assets and profits that are often not assessed.
Climate risks are different from most social and governance concerns because they can impact physical assets and cause business disruption. According to Barron’s, 60 percent of companies in the S&P 500 Index “hold assets that are at high risk of at least one type of climate-change physical risk.”
Asset manager directives usually combine climate change with important—but less existential—social and governance issue risks, such as board quality and executive compensation. The potential devastation of climate change makes this combination questionable.
Initiatives to address climate change:
- On Earth Day, April 22, 2021, President Biden set ambitious new targets to address the climate crisis, committing the U.S. to cut its greenhouse gas emissions in half, relative to 2005 levels, by the end of the decade—double the target set by President Barack Obama in 2015. More details of his initiatives and their impacts on business will be forthcoming over the next few weeks.
- Organizations such as The World Economic Forum have developed climate change governance principles for boards of directors. For example, see www.weforum.org/whitepapers/how-to-set-up-effective-climate-governance-on-corporate-boards-guiding-principles-and-questions.
- Companies should conduct a comprehensive assessment via a multi-disciplinary team including engineers, risk managers, climate scientists and business strategists, to assess projected climate risks such as those from rises in water levels, turbulent weather events such as hurricanes, temperature changes, infrastructure damage and supply and customer disruptions. Mitigation strategies should be developed. Not to be overlooked are potential competitive opportunities from climate change, such as impacted competitors, technology innovations and supply chain differentiation.
Denise Drace-Brownell, JD, MPH
Science and technology innovation executive, Author
CEO, DDB Technology, LLC New York, NY