Guide to ESG Risk

The importance of Environmental, Social, and Governance (ESG) factors in business is rapidly increasing. Stakeholders demand greater transparency and accountability, pushing companies to integrate ESG criteria into their risk management strategies.

 

What is ESG risk?

ESG risk refers to the potential negative impact on a company's financial performance and reputation resulting from environmental, social, and governance issues. These sustainability risks can manifest in various ways, depending on the nature of the business and its industry.

Environmental Risks Factors

• Climate Change: Companies may face operational disruptions due to extreme weather events, increased costs related to carbon pricing, and shifting consumer preferences towards companies with lower carbon footprints.
• Resource Depletion: Scarcity of natural resources like water, minerals, and fossil fuels can increase operational costs and create supply chain vulnerabilities.
• Pollution and Waste: Mismanagement of waste and pollution control can lead to regulatory fines, clean-up costs, and reputational damage.
• Biodiversity Loss: Activities that harm ecosystems can result in legal actions, loss of operating licences, and long-term ecological and economic harm.

Social Risks Factors

• Labour Practices: Companies must ensure fair wages, safe working conditions, and labour rights. Violations can lead to strikes, high employee turnover, and reputational harm.
• Health and Safety Standards: Failing to maintain robust health and safety protocols can result in workplace accidents, legal liabilities, and productivity losses.
• Human Rights Issues: Companies operating in regions with poor human rights records must ensure their supply chains do not exploit forced labour, child labour, or other human rights abuses.
• Community Relations: Companies need to engage positively with communities to maintain a social licence to operate. Negative impacts on local communities can lead to protests, project delays, and loss of local support.

Governance Risks Factors

• Board Diversity and Independence: A diverse and independent board can provide balanced perspectives and reduce the risks of groupthink and conflicts of interest.
• Executive Compensation: Misalignment between executive pay and company performance can lead to shareholder discontent and poor governance perceptions.
• Internal Controls and Audits: Strong internal control systems and rigorous audits are essential to prevent fraud and ensure accurate financial reporting.
• Shareholder Rights: Respecting shareholder rights helps maintain investor confidence and promotes transparency and accountability.

 

ESG Risk Management and Assessment

ESG risk assessment and management identifies and mitigates risks related to environmental, social, and governance factors. It helps safeguard financial performance, enhance reputation, and ensure regulatory compliance.

Proactively addressing ESG risks prevents disruptions and legal issues while promoting sustainable growth and fostering investor confidence. Integrating ESG considerations into business strategies is essential for resilient and responsible corporate governance.

Steps in Accessing and Managing ESG Risk

1. The first step in managing ESG risks is accurate identification through thorough analysis. Tools like risk management frameworks, industry benchmarks, and stakeholder feedback assist in pinpointing risks. Regular audits and assessments can also uncover hidden issues.
2. Evaluate and measure identified risks using qualitative and quantitative analyses. Metrics like carbon footprint and governance scores quantify risks, while interviews and consultations provide deeper insights. Assess financial, operational, and reputational impacts to grasp the full scope of the issues.
3. After assessing ESG risks, prioritise them by severity and likelihood to allocate resources efficiently. Tools like risk heat maps and matrices aid decision-making, helping companies mitigate significant threats to operations and stakeholder trust.

 

Ajinomoto Malaysia’s Approach to ESG and Sustainability

Ajinomoto Malaysia has systematically embedded ESG (Environmental, Social, and Governance) risk management policies into its corporate strategy since 2017, starting with its first Sustainability Statement.
Over the years, AMB has established various committees such as the Sustainability Working Committee, Environmental Management System Committee, and Risk Management Committee to monitor and address sustainability issues.

The key initiatives include capacity-building programs, work style innovation for flexibility, transitioning to recyclable packaging, and updating digital HR systems.

By recognising the importance of the ESG and sustainability, Ajinomoto Malaysia collaborates with the Malaysian Recycling Alliance (MAREA) to advance sustainable practices in Malaysia. This partnership underscores our commitment to environmental stewardship and its dedication to contributing to a sustainable future for Malaysia and beyond through our eco-friendly facility.