ESG Risk Model
How to map ESG risks
When it comes to risk management, it is essential to look outside to see how the world is changing and how others are responding. Then one needs to look inside to see how well the firm is prepared for the changes on the horizon.
Extracted from the WEF report Climate Change related risks can be grouped in 3 main categories:
Physical risk: Related to loss caused by the environment as a result of climate change, such as flooding, drought or wild-fires.
Transition risk: Related to loss caused by transitioning to a low carbon economy in response to climate change, such as government action, technology disruptions or changing investor and customer expectations.
Liability risk: Related to loss caused as a result of re-dress or court action from marketing of products or public disclosures in relation to climate risk that were not as clear or transparent as required.
From an ESG angle we would then look at it in more details under Environmental, Societal and Governance risks. (In our example, each with top 5 risks extracted from the WEF Global Risk Report 2020)
The recommended way to map ESG risks is to plug them in a standard ERM (Enterprise Risk Management) matrix and get, for each of them, a clear understanding not only if a specific risk is on a specific “path” but where exactly it is (Beginning, middle, end of path?).
Path A: Time for a change. The company knows what challenges it has to address. There should still be some time to review the business model.
Path B: Usually associated with a need to strengthen the (sustainability) portfolio management
Path C: The “Time Bomb”: Most dangerous path up to a possible business disruption. Drastic change management required to mitigate the risk.
The below example is for illustration purpose only.
Linking ESG risks to an Enterprise Risk Management should be part of any materiality analysis. It is part of our analysis module. More information at: