The impact of ESG risks on business performance

- [Instructor] ESG risks affect how companies operate, invest and compete. And when left unmanaged, they erode performance operationally and financially. According to an IBM research, companies failing to address ESG concerns face revenue losses ranging from 6% to 20%, largely due to supply chain disruptions. McKinsey found that companies managing ESG proactively, while also prioritizing growth and profitability, earned two percentage points more in excess total shareholder return compared to peers focused solely on financial performance. Operational risks are where ESG hits daily activities. ESG risks often show up first in operations where disruptions are tangible, immediate, and costly. Supply chains are one of the major sources of ESG related losses. Disruptions happen when environmental events hold production. Social issues trigger reputational or labor crisis or governance. Failures at suppliers expose your business to compliance and legal risks. Workforce and human capital risks are also top concerns for many organizations. Social performance directly affects productivity, retention, and talent acquisition. High turnover, disengaged employees and reputational damage in employer markets stem from poor social practices and once talent loss accelerates, recovery is costly. Governance risks due to lose oversight, poor board engagement or lacking controls and accountability mechanisms result in regulatory scrutiny, reputational risks, fines, and increase in costly and time-intensive remediation obligations. ESG-related environmental risks also manifest in asset management. Extreme weather, water scarcity, and changing regulations can make facilities non-compliant or underperforming. These risks limit operational continuity and reduce long-term asset value. In addition to operational risks, financial risks tied to ESG can undermine access to capital, weaken valuations, and threaten overall stability. ESG blind spots are increasingly linked to customer loss, pricing pressure, and restricted access to new markets. Consumers formally or informally put pressure on organizations due to procurement and loyalty decisions. Lenders and investors factor ESG performance into risk assessments. Poor ESG metrics raise borrowing costs, trigger exclusion from green, or sustainability linked finance, and create red flags in investor due diligence. The cost of transferring ESG risk is also going up. Companies with poor ESG records face higher insurance premiums or denial of coverage, especially for climate-related risks. Self-insuring these risks is expensive and increasingly necessary for the unprepared. I know we covered a lot, both operationally and financially. Please take a moment now and consider the following question to help you assess how ESG risks may be showing up in your own organization or industry. What environmental, social, and governance risks, if left unmanaged, could materially affect your organizations or industry's financial stability and ability to operate?