Businesses today cannot only limit their governance and compliance scope to the narrow boundaries of accounting and operations. Many risks to business continuity and competitiveness, and even social or regulatory (or both) “license to operate“, sit squarely in the environmental or social pillars of what is commonly known as the “ESG” (Environment, Society and Governance) scopes that a business must manage and navigate. These also translate to the “Triple Bottom Line” (TBL) or 3Ps (People, Planet, Profit) constructs upon which a company’s performance is increasingly assessed – by investors, lenders, employees, customers, and prospective employees and customers as well.
For a company that doesn’t pay attention to these areas, many risks may lie undiscovered only to cause real damage later on.
When do such risks arise?
When profit is placed before values
As human beings, we are always obliged to protect our environment due to its finite resources, that cannot be easily replaced. Similarly, we might be too harsh when it comes to nurturing and managing our most essential resource – also usually our biggest cost center – our Human Resources, or our other crucial stakeholders, customers, and society at large.
In the rat-race to earn a profit, we sometimes forget the environmental or social harm we may cause to the external operating environment – and even within our business. This may have detrimental effects that can affect many generations and should be dealt with proactively. Social aspects like workers rights, integrity and values should always be upheld and in these changing times, the business should align its goals and preparations to mitigating any contribution to climate change, and managing all its effects.
The notion that organizations and the environment are not interdependent
Organizations will never thrive without the physical environment they operate in. They receive resources from the environment with which they produce goods and services that make their businesses successful. It is always important to remember this reciprocal relationship creates a balance between conserving the environment and using it for the development of a business.
When short-term goals are given more priority than long-term sustainability
Easy shortcuts to achieve short term goals are no doubt wonderful. However, there is a need for reviewing the after-effects of short term achievements since they may have unprecedented, long term consequences like effects of aggressive financial engineering, loss of morale or damage to corporate profile, environmental pollution, or damage to the environment.
Environmental issues can be temporary or permanent changes to the atmosphere, water, and land due to human activities. An Environmental impact is any change to the environment wholly or partially resulting from an organization’s a) activities, b) products, c) processes or d) services either directly or indirectly.
Social issues are seen in workplace operations and may also impact the surrounding communities.
Some of the most common environmental and social risks
| Environmental Risks | Social Risks |
| Air emissions | Labour and working conditions |
| Energy use | Occupational health and safety |
| Hazardous material usage | Community health, safety and security |
| Land contamination | Welfare of indigenous or vulnerable communities |
| Cultural heritage |
Delving deeper: Here’s a list of risks that can emerge
Liability Risk: including fines, penalties and costs for addressing third-party claims for damages due to negligence in managing environmental and social risks in operations and clean-up of contamination. Environmental and social risks associated with a client’s/investor’s operations.
Financial Risk: Stems from potential disruption of operations as a result of environmental and social problems. Failure to effectively address environmental and social considerations can put the business operations as well as the Bank at risk.
Reputational Risk: Due to potentially negative publicity associated with poor environmental and social practices and will harm its brand value and image.
Credit Risk: when a buyer is not able to fulfil the contractual obligations as a result of environmental and social issues.
Market Risk: Stems from a reduction in the value of collateral associated with a transaction due to environmental and social problems.
The ultimate consequence you might have to bear is a tarnished reputation – which can have real long-term financial and HR impacts; loss of profit, or loss of assets, any which can have an adverse effect on the long term trajectory of your success as an organization.