4 steps to improving your ESG risk management to increase financial performance

Environmental, Social, and Governance (ESG) risk management has emerged as a critical aspect of business strategy for companies worldwide. A 2023 IBM IBV study showed that organizations that are seen as ESG leaders are 43% more likely to outperform their peers on profitability. However, 57% of CEOs admit that defining and measuring the Return on Investment (ROI) and economic benefits of their sustainability efforts remain a significant challenge. Focusing on ESG Risk Management can help your organization become more profitable, and your organization can start on this journey today.

So how does ESG help the bottom line? Customers have a much greater interest in sustainability and impact then previous generations. 68% of customers say that environmental sustainability is very or extremely important to them, with nearly half paying a premium price for environmentally sustainable or socially responsible products in the last year. IBM has also found that ESG leaders can boost revenue through unexpected channels. An example of this is where IBM worked with a consumer-packaged goods (CPG) brand in Europe to put a QR code on the packaging. The QR code meant that customers could scan the code to learn about the journey of the products, which translated to an 8% rise in sales.

With ESG being so important today, here are some of the best ways of managing your ESG risk and identifying your organization’s gaps:

1. Conduct ESG assessments. Like any risk assessment, this process typically involves a thorough review of the company’s operations and supply chain to identify potential ESG risks and opportunities. It can be conducted with a similar process to a Cyber Security Assessment with a consultant (gathering data, conducting stakeholder interviews, and analyzing existing policies and practices). This process can be accelerated by using technology to analyze benchmark data such as that supplied by Prevalent (one of IBM’s partners). The resultant assessment should quantify the likelihood of any risk occurring and potential impact of any identified risk.

2. Remediate risks and put together implementation plans. Once an ESG assessment has been completed, the organization should develop and implement strategies to remediate identified ESG risks and opportunities within an agreed upon time frame. The likelihood of the risk occurring (and the impact should it happen) would inform the prioritization process.

For example, if the assessment identified that environmental risks related to carbon emissions were a priority, the implementation plan might include initiatives to reduce energy consumption, increase renewable energy usage or invest in carbon offset projects.

3. Monitor and track ESG performance. Companies should monitor and track ESG performance, using metrics such as carbon emissions, human rights violations and labor practices. This can involve using technology solutions such as Prevalent to collect and analyze data, and then engaging with suppliers to improve performance.

4. Collaborate with suppliers. The 2023 IBM IBV study found only 20% of organizations are integrating ESG metrics into supply chain operations. Companies should collaborate with their suppliers to improve ESG performance and sustainability by agreeing on clear ESG goals and standards, as well as providing them with the necessary education and support to meet these standards. For example, companies can provide their suppliers with ESG training on how to improve their labor practices, environmental management and governance. Furthermore, companies could incentivize their suppliers by offering long-term contracts or bonuses should they reach a certain ESG standard or score.

In conclusion, managing ESG risk in the supply chain is crucial for businesses to mitigate financial and reputational risks, comply with regulations and drive better financial performance. ESG risk can be managed in a similar way to any other type of risk in the business. Board members are increasingly prioritizing ESG, and adapting existing methods and techniques can ensure that high-quality risk assessments can be conducted.