Managing the Reputational Risk Associated with Climate Change and ESG
@ the IERP® Global Conference, August 2023
“We need to get better at managing data, especially ESG data,” said Dr Darian McBain, CEO, Outsourced Chief Sustainability Officer Asia, and Co-Founder, GreenFi, at the start of her presentation. Citing several examples from her own experience in the field over several decades, she said that in the 1990s, environmental engineers were looking at how to design bridges that could withstand floods which would happen maybe once in a century. “The risk then was once-in-100-year floods. Maybe it would happen, maybe it wouldn’t. But now such floods are happening maybe once in five years. The probability has increased; the efficiency of doing these calculations is decreasing.”
So what is required to manage the reputational risk associated with climate change and ESG, when risks themselves are constantly changing? Dr McBain suggested several, including credible ESG due diligence, ongoing sustainability monitoring in real-time, risk mitigation planning, and thought leadership. “ESG is a multi-disciplinary topic spanning environmentalism, capitalism, law, regulation, politics,” she acknowledged. “Everything we do has an impact across Environment, Social and Governance factors. ESG data is fragmented and unstructured, making it difficult to collect, analyse and make good decisions from (them).”
Additionally, there was a lack of standardised ESG data formats and definitions. Comparing companies across industries or sectors was thus not easy. She pointed out that even within an organisation, data is often siloed, making a comprehensive view of a company’s ESG performance challenging. Also, separate departments within an organisation may separately analyse the data and deliver conflicting information. Manual processes for collecting and analysing ESG data were time-consuming, resource-intensive and could sometimes be overwhelming. “There is a lack of ESG experts with the skills and knowledge to interpret ESG data,” she said.
These factors all influence decision-making; without the right data and analysis, it is difficult to make informed decisions about ESG risks and opportunities. It is easy to see how allegations of ‘greenwashing’ may arise if there is a lack of understanding of the value chain. The issue of climate change, which is currently high-profile, is an example of how dynamic problems have to be managed, to avoid what may be perceived as greenwashing. “What you have to do with ESG risk, is manage a very dynamic system across multiple factors,” she said, adding that big datasets can be managed with both human intelligence and AI.
“These issues are very complex, and we need to get much better at managing them,” she advised. “Usually, different groups look after different issues, and it is hard to bring them all together. Use AI to bring them all together, to get a broad perspective of ESG.” Despite difficulties, companies were getting better at disclosing and using analytics. She cited the use of AI in the Emergency Room as an example, where AI was able to consider more factors than human doctors and eliminate human bias as well. Being able to access data and information was critical in order to gauge if companies were on the right track or not.
She used ‘fast fashion’ as an example of how complex supply chain data could be. “(You have to ask) was the person who made it paid a fair wage?” she said. “Was there child labour involved? Did they have access to facilities? (If it was a jacket) the cotton could have come from China; the synthetic inner from Vietnam. The buttons could have come from Turkey, sewn with thread from India. You also have to think about how it was dyed, and how it was transported to where it was sold. Were pesticides used on the cotton that went into the fabric of the jacket? There is so much data to keep track of, for just one item!”
Additionally, different regulations apply in different regions, and the issue of double materiality can make things even more complex. Given the requirements that companies wanting to implement ESG must comply with, she said this information also must be accessible in order to determine whether the company was doing the correct things to achieve its objectives; investigating and taking action where and when necessary was part of it. Companies also need to consider the impact of their activities on society, and how to keep track of ESG risks when these are constantly changing. New regulations are also issued constantly and need to be tracked.
Communication is key. “You have to be very conscious about how you communicate what you do,” she said. “If you are going to make claims about your ESG and sustainability, you need to have the numbers and data, and these must be verifiable before you make any claims – or it will be greenwashing.” On the other end of the scale, there was ‘greenhushing’ – where companies do not say anything because they do not want to draw attention to themselves. She remarked that companies which have made commitments to net zero are beginning to realise how difficult it really is, and advised that with reputational risk, companies should not make commitments if they lack the necessary resources.
It has been said that it takes 20 years to build a reputation and five minutes to lose it. But even with so many factors to consider, she pointed out that reputation risk and ESG risks are probably not the biggest risks facing businesses today. “The biggest risk to your business is from the impacts of climate change that will affect all businesses in different ways,” she said. “Many companies have not thought how all these events are going to play out…you do not want to sleepwalk into this. You need the data to be informed, and…manage the risks. ESG risks and climate change are not separate risks; it’s one continuum. It is fundamentally how you do business, and how you manage and mitigate your risks.”