The two terms ESG and climate change can be confusing to understand in terms of risk to businesses. In simple terms, ESG is environmental, social and governance principles. Social includes matters such as labor disputes, product liability, shifting regulations, and demographics, among other things. Governance includes diversity issues, oversight of corporate risks, strategic directions and growth opportunity maximization. When applied to companies and businesses around the world, these principles have huge effects and are directly related to climate change.
The World Meteorological Organization predicted that there is a 50-50 chance that global temperatures will reach 1.5% C in the next five years. This means that the world record for temperature reached in 2016 will be passed by the year 2026. This global crisis is often linked to physical health, however, it will also have huge effects on businesses. The rising temperatures will affect business productivity, customer preferences, and physical assets. This pushes businesses to focus on greener production options, sustainable suppliers and reducing energy consumption.
Businesses are facing huge infrastructure changes due to the climate phenomenon in 2022. They must consider physical effects like employee transportation, power outages and other physical costs of the climate crisis. There are also other liabilities like legal requirements that businesses must meet and shifting consumer needs. Businesses, especially, are responsible for mass amounts of waste, whether it’s plastic pollution, carbon emissions, or other types of hazardous waste. All of these things are now known to affect the climate negatively and are in turn affecting businesses in their productivity allowance.
A study by Deloitte in 2020 showed that customers are making huge demands for companies to think more environmentally forward and to act more sustainably. This is another huge incentive for businesses to address climate change and their effect on the environment. According to another study, this one done in 2021 by Simon-Kucher & Partners, 83% are turning towards sustainable purchasing and behaviors.
As recently as this year, CEOs are coming to realize that climate change has the potential to cause huge risks for their businesses. Not only is the consumer mindset towards sustainability shifting, but the climate crisis is becoming much more of a reality. The huge amounts of energy consumed by businesses is becoming a problem and leaders are predicting huge costs and losses for their companies in the coming years.