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Environmental, social, governance issues create risks: Deloitte

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Environmental, social, governance issues create risks: Deloitte

A new report from Deloitte L.L.P. finds that environmental, social and governance issues can lead to crises resulting in fundamental shifts in companies' management cultures and their financial well-being.

“A growing class of risks, they can be financially material and increasingly a concern in today's growth-challenged and volatile environment, when even small shocks from the outside world can determine whether a company sinks or swims,” the report said.

At the same time, companies that are prepared for ESG shocks can better manage short- and long-term risks, the report said, making disclosure of ESG risk management efforts critical because it can help win favor from investors.

The Deloitte Review article, “Finding the Value in Environmental, Social and Governance Performance,” said companies with positive ESG reputations can enjoy an “ESG halo.” For example, according to the report, such companies were shielded from declines in stock prices during the time of the 1999 World Trade Organization protests in Seattle, even if the companies operated in industries considered environmentally damaging or labor abusing.

“For these reasons, ESG disclosure is valuable because it helps a company demonstrate that it is managing its risks and has a track record of paying attention to its ESG performance,” the report said.

“ESG events can occur at any time as a short-term shock which, if repeated, can chip away at a company's performance or be large-scale catastrophes of the black swan variety, especially for companies already facing a tough business environment,” the report said.

And, according to the report, ESG events at one company can negatively affect the returns of industry peers.

Making ESG issues particularly challenging for companies is that they can occur anywhere along the value chain, the report said, with many risks such as labor protests, safety concerns and ecosystem damage embedded in supply chains and subject to increasing attention.