Companies that ignore environmental, social, and governance (ESG) issues may face several practical risks that can affect their finances, reputation, and ability to operate.

Why has ESG become increasingly important?

ESG reporting has become increasingly important as investors, regulators, and the public seek greater transparency about how companies manage environmental and social risks. Here are some statistics that show increased transparency, and possibly even some mandatory disclosure in the future regarding ESG:

• A global survey of the 100 largest companies in 52 countries found that 80% now report on sustainability performance, rising to 96% among the world’s 250 largest companies.
• In Canada, ESG reporting is also increasing. For example, 71% of companies listed on the S&P/TSX Composite Index released ESG or sustainability reports in 2020, up from 58% in 2019.
• The Government of Canada has indicated that it is moving toward a mandatory climate-related financial disclosure system based on the Task Force on Climate-related Financial Disclosures (TCFD).

1. Loss of Investors and Access to Capital

Investors increasingly use ESG data to decide where to invest their money.

Investors believe ESG factors help identify:

• • the long-term financial risks of the company
  • possible governance problems
  • environmental liabilities

If companies ignore ESG:

• • lose investors
  • struggle to raise funding
  • face higher borrowing costs
  • financial institutions and investors may view companies with poor ESG performance as riskier investments

2. Legal and Regulatory Risks

Governments and regulators around the world are introducing new ESG-related laws and disclosure requirements. Companies that ignore ESG may face:

• • fines
  • investigations
  • regulatory enforcement
  • lawsuits

Key reasons this risk is growing:

• • governments are tightening environmental and corporate disclosure laws
  • regulators are cracking down on greenwashing (misleading sustainability claims)
  • courts are increasingly hearing climate-related lawsuits against corporations

3. Financial Performance Risks

Poor ESG management can harm a company’s financial performance. Research shows that companies with unmanaged ESG risks perform worse financially than those that manage them effectively.

Why does ESG affect financial performance?

Ignoring ESG can lead to:

• • environmental disasters
  • workplace scandals
  • regulatory penalties

These problems can result in:

• • lower profits
  • falling stock prices
  • increased risk of default

4. Reputational Damage

A company’s reputation is one of its most valuable assets.

Ignoring ESG can harm reputation through:

• • environmental damage
  • poor labour practices
  • discrimination or harassment scandals
  • misleading sustainability claims

When ESG scandals occur:

• • customers may boycott the company
  • investors may withdraw funding
  • employees may leave
  • the company’s brand value may decline

More information

For more information, visit The Canada Energy Regulator and ESG – Overview of Environmental, Social, and Governance (ESG).

								
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