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The hidden costs of ESG risk, 3 business strategies to minimise it

Updated: Sep 4, 2019

Leaders Arena has recently published a study on the material impact of corporate Environmental, Social and Governance (ESG) breaches, focusing on five high-profile corporate scandals which have taken place since 2010.

The paper argues that some of these incidents could have been avoided altogether and, in all instances, their impact minimised had companies embraced three easy-to-implement management strategies.

Miguel Santisteve, Managing Director of Leaders Arena, explains how ‘ESG risk is often misunderstood by both companies and their institutional investors. The risk posed by corporate ESG scandals needs to be fully understood to be managed properly’.

The study tracks the impact on 5 stocks: Volkswagen, Tesco, Barclays, TEPCO and BP since 2010.

Different ESG-related breaches contributed in varying degrees to the underperformance of these five stocks over the six-year period.

These case studies highlight how issues including ethics compliance, community relations, employee and management diversity, ownership structure, customer relations and health and safety can have a tremendous impact on both a company’s ability to grow and generate profits, and consequently on the returns investors in that company can expect.

From peak to trough, the implied equity value lost by these five companies amounted to USD 360bn by the end of 2015, the equivalent of Austria’s annual GDP.

Two important questions come to the fore:

  1. What are the critical lessons to be learned from these high-impact ESG cases?

  2. Is there anything intrinsically embedded in our capitalist system which prevents companies from governing themselves in an ethical way to avoid massive financial losses, irreversible environmental damage and social suffering on the scale seen before?

The paper argues that there are indeed lessons to be learnt. It also suggests companies might have the solutions to this type of acute risk right in front of them in the form of easy-to-implement business strategies. Better risk-management policies, incentivising and protecting genuine whistleblower disclosures and embracing corporate dialogue with investors on ESG issues should deliver just that.

Failure to act now will likely result in a never-ending cycle of costly damage to the economy and society at a time when businesses’ licence to operate should not be taken for granted.

Lessons must be learnt and action cannot be delayed.

You may download the study when you sign-in or register with Leaders Arena.

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