Over the next ten years the world is likely to see climate change impacting global markets, driving rising food inflation and trade disruption. Food, together with pharmaceuticals and medical equipment, is essential. At the start of the pandemic, there was concern about domestic shortages and if the prices of other goods would be affected.
Because of the way markets are related, many countries would likely experience the domino effect of this. While it is easy to attribute price increases to the knock-on effects of the pandemic, the problems go deeper than that. Some analysts say that ‘food nationalism’ is on the rise; food is being ‘weaponised’ and the food crisis is a developing risk, one which is becoming increasingly significant. How does climate change factor into all this? One example may be the effect it has on human migration.
Displaced by environmental disasters like landslides or flooding brought about by creeping climate change, farmers may abandon fields; food production may decrease. The business landscape too is evolving, with companies increasingly incorporating Environmental, Social and Governance (ESG) factors into their policies, strategies, practices and processes. Business sustainability is becoming increasingly important. Some firms are even prioritising it over financial success, seeing it as a way to access capital and investments.
The perception of stakeholders that companies are operating contrary to ESG factors may cause them to discontinue relationships with organisations which they see as exploitative, oppressive, insensitive or unethical in their treatment of employees, communities or the environment. There is increasing focus on ESG, particularly in the area of climate change. The pandemic has permanently altered the business landscape and global supply chains, and volatile geopolitical environments are exacerbating these further.
With all this in mind, how should risk professionals manage the constantly evolving risk challenges confronting their organisations? Experts suggest looking at business-specific considerations, identifying potential ESG risks specific to the business and assessing how these ESG risks can be transmitted to your business risks through sales, costs, operations, manpower, productivity, reputation etc. Once you have identified and assessed the impact of these risks on the business, you can start establishing risk controls such as governance, policy, and targets, and establishing the tone from the top, among other things. Climate change is an example of an environmental risk.
Firms should consider stakeholder expectations; organisational commitments; the most optimum way of infusing ESG into organisational strategy; creating value through innovation and technology; and communicating outcomes through appropriate governance and disclosures. Will all these actions mitigate food inflation, GDP slowdown, and climate change? Analysts note that greenhouse gas emissions (GHGs), for instance, are now seriously considered by banks, because it is an imminent regulatory requirement. GHGs are closely linked to climate change.
Banks will soon be required to disclose the GHG emissions of their customers, with the move to Net Zero. Companies with high GHG emissions may find their ability to obtain loans or financing adversely impacted. Supply chain disruption is likely to continue although logistics have improved, as congestion at ports has not been completely resolved. This has pushed up prices and exacerbated food inflation. Markets are vulnerable to volatility; risk and uncertainty are rising, and there are fears of a global economic slowdown and recession. Prioritising sustainability has become crucial.
ESG factors will impact businesses in the long term; companies thus have to think seriously about sustainability. Adopting an ERM framework will help organisations identify ESG risks, understand how business risks could develop from there, and establish appropriate controls to support sustainability. Being a sustainable organisation means maintaining long-term relevance; organisations can only do this if they consider the long-term needs of stakeholders.
While ESG can impact an organisation, it is also about seeing opportunities that can create value in the long term. Careful, comprehensive documentation, for instance, provides reliable data for strategic planning and decision-making. Observation and monitoring provide feedback for systems improvement and could red-flag shortfalls before they become major issues. Meeting these needs aligns with ESG factors, and helps organisations develop resilience in the face of disruption and uncertainty.
