Top ESG Risk Factors by Industry: Consumer Goods, Tech, Energy, and Finance

NORTHAMPTON, MA / ACCESSWIRE / October 3, 2024 / Antea Group

Stakeholder scrutiny of corporate ESG practices is on the rise.

Investors are increasingly expecting Environment, Social and Governance (ESG) commitments from companies, while regulatory bodies enforce stricter disclosure requirements. Informed consumers expect ethically produced goods, and employees prefer to work for companies with strong ESG values.

This convergence of factors makes it imperative for companies to be aware of the unique ESG risk factors their industries face.

In this post we'll examine the specific ESG risks faced by the following industries:

• Consumer and Industrial Goods

• Technology

• Energy

• Risk and Financial Services

Consumer and Industrial Goods

The Consumer and Industrial Goods (CIG) industry encompasses a wide range of products that are essential for everyday life and industrial processes. This includes consumer goods like food, beverages, clothing, electronics, and household products, as well as industrial goods such as machinery, equipment, and raw materials used in manufacturing and production.

ESG risk factors specific to CIG

Environmental Risks

• Resource depletion: Overuse of natural resources can lead to shortages and increased costs.

• Pollution and waste: Production processes often generate significant waste and emissions, impacting air, soil, land, and water quality.

• Climate change: The industry is susceptible to the effects of climate change, such as supply chain disruptions due to extreme weather events.

Social Risks

• Labor practices: Ensuring fair labor practices and safe working conditions is critical, especially in global supply chains.

• Product safety: Companies must ensure their products are safe for consumers, complying with health and safety regulations.

• Community impact: Operations can significantly impact local communities, requiring careful management of relationships and contributions to local development.

Governance Risks

• Compliance: Staying compliant with a myriad of regulations across different regions can be challenging and costly.

• Ethical business practices: Ensuring ethical conduct in business practices, including anti-corruption measures, is essential for maintaining trust and reputation.

• Transparency in reporting: Companies are expected to provide clear and accurate reporting on their ESG performance.

Impact of SEC climate disclosures and other regulations on the CIG industry

While the SEC rules don't cover Scope 3 emissions (emissions from indirect activities along the supply chain), other global regulations do, pushing firms to integrate ESG considerations into their risk management frameworks.

The complexity of reporting on Scope 3 emissions poses significant challenges, as consumer markets companies often function within a value chain ecosystem that includes thousands of suppliers. Many private sector companies in the supply chain are not subject to ESG disclosure rules and may not be prepared to respond to these requests for data.

Technology Industry

The technology industry consists of companies involved in the development, production, and distribution of technology products and services. This includes sectors such as software, hardware, telecommunications, and media. Tech companies range in size from large multinational corporations to small startups.

Key ESG risk factors specific to the tech sector

Environmental Risks

• Energy consumption: Data centers and other tech infrastructure consume significant amounts of energy, contributing to carbon emissions.

• Electronic waste: Rapid obsolescence of tech products leads to large volumes of electronic waste, which can be hazardous if not properly managed.

• Resource extraction: Manufacturing tech products often requires the extraction of rare and valuable materials, leading to environmental degradation from mining activities.

Social Risks

• Labor practices: Ensuring fair labor practices, especially in manufacturing facilities, is crucial to preventing exploitation and maintaining ethical standards.

• User privacy: Protecting user data and ensuring privacy is a significant concern, given the vast amounts of personal information tech companies handle.

Governance Risks

• Regulatory compliance: Tech companies must navigate complex regulatory environments, including data protection laws and cybersecurity regulations.

• Ethical business practices: Maintaining ethical standards in AI development, algorithm transparency, and content moderation is essential to building trust.

Impact of SEC climate disclosures and other regulations on the tech industry

Given the prevalence of climate action commitments in the technology, media, and telecommunications sector, many companies are subject to SEC climate disclosures and other ESG regulations. They must produce detailed disclosures on their plans and progress for meeting these commitments, including Scope 3 emissions when applicable.

Tech providers play a critical role in the climate transition, offering solutions for carbon accounting and enabling smarter supply chains, factories, cities, and energy grids. The global regulatory requirements present an opportunity for these companies to double down on developing technologies that support ESG reporting requirements.

Energy Industry

The energy sector encompasses companies involved in the extraction, production, distribution, and sale of energy, including fossil fuels (oil, gas, coal), renewable energy (wind, solar, hydroelectric), and utilities. This sector is critical to powering economies and supporting daily life, but it also faces significant environmental and regulatory challenges.

Key ESG risk factors specific to energy companies

Environmental Risks

• Emissions: High greenhouse gas (GHG) emissions from fossil fuel extraction and consumption contribute significantly to climate change.

• Resource depletion: Extracting non-renewable resources like oil and gas leads to depletion and environmental degradation.

• Pollution: Oil spills, methane leaks, and other forms of pollution can have severe environmental impacts.

Social Risks

• Community impact: Energy projects can disrupt local communities, in some cases leading to displacement and placing the health of community members at risk.

• Health and safety: Ensuring the health and safety of workers in hazardous environments like drilling rigs and refineries is crucial.

• Energy access: Addressing energy poverty and ensuring equitable access to energy resources is a major concern.

Governance Risks

• Regulatory compliance: Navigating a complex network of local, national, and international regulations is challenging and costly.

Impact of regulatory frameworks on energy firms regarding ESG disclosures

Energy companies and utilities are continually investing in infrastructure to improve asset resilience and operational reliability. However, regulatory frameworks introduce additional complexities. These regulations delineate between routine costs associated with reliably supplying energy to customers or recovering from typical weather events and the climate-related disclosures required under many global disclosure rules.

The need for accurate and reliable data presents unique challenges for companies with assets like pipelines, transmission lines, drilling rigs, or offshore wind turbines. Expanded global disclosure rules, beyond the industry's already extensive reporting requirements, as well as an accelerated timeline for sustainability reporting, will likely require increased investments and enhancements of existing processes and systems.

Risk and Financial Services Industry

The Risk and Financial Services sector includes a wide range of businesses that manage financial transactions, investments, and risk - such as banks, insurance companies, investment firms, and other financial institutions. These organizations play a crucial role in the economy by facilitating capital flow, managing risk, and supporting economic stability.

Key ESG risk factors specific to financial services companies

Environmental Risks

• Climate risk exposure: Financial firms must assess the climate risks associated with their portfolios, including the impact of physical and transition risks on their assets.

Social Risks

• Fair Lending practices: Ensuring equitable access to financial services and preventing discriminatory lending practices.

• Consumer protection: Protecting consumers from unfair practices and ensuring transparency in financial products and services.

Governance Risks

• Ethical conduct: Maintaining high ethical standards and preventing issues like fraud, money laundering, and corruption.

Impact of regulatory frameworks on financial firms regarding ESG disclosures

Financial services firms face increasing scrutiny under global disclosure regulations, requiring them to transition to investor-grade ESG reporting and upgrade current processes and controls that fall short. One of the most challenging aspects is measuring financed emissions.

While Scope 3 emissions are not covered by the SEC rules, other global regulations mandate reporting on this topic.

Financial firms should expect to have limited comparable reporting data from their counterparties about climate risks and emissions. In California, climate disclosure requirements include private companies that meet certain criteria, but many private market organizations will not be subject to these reporting requirements, presenting an additional data collection challenge.

Antea Group offers ESG Advisory Services to ensure you're prepared to comply with new climate rules and regulations, regardless of your industry.

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SOURCE: Antea Group