5 Risks of ESG mismanagement that you can’t afford 

Some may argue that ESG risks aren’t something to be worried about yet. However, being unprepared can expose the business to significant legal and financial risks.

For years, Volkswagen marketed itself as the eco-friendly car company, claiming to use what they called “Clean Diesel” to power their cars, and positioned themselves as an alternative to hybrid and electric vehicles. 

Unknown to the public, VW had installed cheating software inside its cars that could detect when they were being tested for emissions. While their cars were passing emissions tests with a green light, they were actually pumping out more than 40x the legally permitted emissions levels, threatening the health and safety of customers and non-customers alike. 

Later known simply as “Dieselgate,” the revelation in 2015 about VW’s true emissions levels sent dramatic ripples throughout the investing and business communities. In the span of two short months, the business lost $42.5 billion –  46% of its value. VW was forced to pay billions in damages and fines to customers and dealers. And some of the lawsuits, including one against the CEO in Germany, have been settled for nearly $350 million

“We have totally screwed up,” said VW of America CEO Michael Horn, while VW’s chief executive, Martin Winterkorn, said his company had “broken the trust of our customers and the public.” Winterkorn resigned as a direct result of the scandal. 

ESG mismanagement in the news

When we think about environmental, social and governance (ESG) issues in the corporate world, VW isn’t the only company that has caught itself ensnarled in ESG-related scandals. Just consider the following examples: 

  • Meta: Meta has been accused of various ESG failures, including spreading misinformation, and allowing hate speech, and it currently faces a $1.3 billion fine in the European Union for failing to protect user privacy. The company has faced numerous lawsuits and regulatory investigations because of these missteps. 
  • Shell: The district court in the Hague has ordered Europe’s largest oil company, Shell, to reduce its carbon emissions by net 45% by 2030 compared with 2019 levels. Shell has been criticized for  its decision to quietly shelve their plans to offset carbon emissions, which involved spending up to $100 million a year to build a pipeline of carbon credits. 
  • Boeing: Boeing has faced numerous ESG-related issues in recent years, including the two 737 Max crashes, which killed 346 people and were caused by a software malfunction that Boeing had failed to disclose to regulators and pilots. Boeing avoided a trial by settling for $2.5 billion. The company has also been criticized for its lack of diversity and inclusion, and for its role in contributing to climate change. 

Some may argue that ESG risks aren’t something to be worried about yet. However, according to the Corporate Governance Institute, with the pace at which the ESG conversation is moving, being unprepared can lead the business to significant legal vulnerabilities and financial danger. 

Below are 5 risks of ESG mismanagement (that you can’t afford):

1. Tarnished reputation and brand value: Prioritizing more ethical and sustainable practices demonstrates your company’s commitment to responsible business conduct. Failure to commit to these goals can lead to a damaged reputation, which diminishes brand value and customer trust. 

2. Restricted access to capital and increased costs: Companies with strong ESG performance often attract a broader pool of investors, including those focused on sustainable and responsible investing. ESG mismanagement can lead to less access to capital and potentially higher borrowing costs.  

3. Regulatory non-compliance and increased legal risks: Proactively addressing ESG concerns can help companies stay ahead of evolving regulatory requirements. Ignoring or mismanaging ESG leads to non-compliance and potential legal issues, which can be costly and damaging to a company’s reputation.  

4. Stagnation and competitive disadvantage: When companies focus on adopting more sustainable practices, they encourage the exploration of new technologies, materials, and processes with lower environmental impacts. As consumers increasingly seek products and services that are environmentally conscious and socially responsible, businesses that proactively integrate these considerations into their offerings gain a competitive edge.  

5. Lowered employee engagement and productivity: Companies that prioritize ESG goals are often more attractive to potential employees. Employees are more likely to be engaged and motivated when they work for a company that shares their values and is committed to social and environmental responsibility. 

Conclusion 

The era is ESG is here, and with it comes opportunities and risks. It is critical you conduct a comprehensive review of existing legal frameworks related to ESG and thoroughly understand their implications and associated risks. Now is the time to consider those risks – like non-compliance or lawsuits – and what is needed to help protect your organization.

To learn how to mitigate these risks and ensure ESG compliance with CLM, check out our ESG Playbook here. 

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