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Lately, there’s been a lot of talk about the recent COP26 climate change conference held in Glasgow, with opinions being mixed on the successes or failures of those talks. But one theme from the many published thoughts about COP26 illustrates the interconnectedness of environmental, social, and governance (ESG) issues.
It begins with the obvious environmental issues involved in mitigating the effects of climate change. We have a serious problem to address. But the ensuing discussion of energy inevitably raises numerous social issues, especially those relating to the haves and the have-nots of the world. Several poor countries with some of the worst social issues are rich in fossil fuels, and extracting those resources could provide those countries with the funds needed to make progress with some of these problems. As many others have pointed out, it’s easier for rich countries to commit to some of the environmental goals related to reduced reliance on fossil fuels than it is for poorer countries (COP26 attempted to address this issue, but the result has been met with disappointment from some of the countries most affected).
But it’s even more complicated than that. Regardless of whether poor countries can enrich themselves from their fossil fuel supplies or the wealthier countries continue to develop alternative fuels and make other commitments to climate mitigation through new technologies, new opportunities for corruption, a governance risk, emerge. Some of the same poor countries have rampant corruption within their governments as well as in the energy sector. Meanwhile, as more new businesses and technologies emerge to capitalize on the growing alternative energy market, corruption is bound to occur there, too.
This is an admittedly very simplistic explanation of a global view of ESG risks. However, I think it mirrors how organizations need to view their own balancing act of ESG risks. Just as compliance, strategic, financial, and other risks often have important interactions with one another—an action that mitigates one risk may increase another—so too are the connections between various ESG risks.
Viewing any type of risk in a vacuum is always dangerous. Taking a portfolio or organization-wide view of risk is an important element of risk management. Organizations must carefully consider risk interactions as part of any risk strategy.
