Environmental Social and Governance (“ESG") reputational risks are the possible adverse effects on a corporation's brand reputation, financial performance and stakeholder relations caused by its actions or inactions on ESG issues. These ESG issues include climate change, human rights, labor standards, diversity, ethics, and transparency. ESG reputational risks can arise from different causes, such as ethical scandals, customer feedback, social media criticism, regulatory oversight, or employee advocacy.

Prioritizing ESG reputational risks are important because of its effect on a corporation's financial performance, market value, and competitive advantage through the loss of goodwill, customers, investors employers and the consequence of legal liabilities. According to a study by the World Economic Forum, more than 25% of a corporation's market value is directly attributable to its reputation.¹ Moreover, a survey by Deloitte found that 87% of executives rated reputation risk as more important or much more important than other strategic risks.² ESG reputational risks can also influence the decisions and behaviors of various stakeholders, such as customers, employees, investors, suppliers, regulators, and communities in their contribution to the profitability and productivity of the corporation. For instance, a study by Nielsen showed that 66% of global consumers are willing to pay more for products and services from companies that are committed to positive social and environmental impact.³

Therefore, corporations need to proactively manage and mitigate ESG reputational risks, by adopting and implementing effective strategies, policies, and practices in their Enterprise Risk Management (ERM) framework to enhance their corporate reputation and resilience. ERM is a comprehensive method of managing all kinds of risks that a corporation is typically exposed to, which also includes ESG reputational risks.

This article explores some of the corporate governance best practices that a corporation can include in its ERM framework, to mitigate against its exposure to ESG reputational risks. These include:

1. Conducting a Comprehensive Materiality Assessment for ESG Risk

A materiality analysis, which is an assessment of the ESG risks that a corporation is most likely to face, can be a veritable tool in mitigating ESG reputational risks. As a part of their ERM strategies, corporations can use materiality analysis to focus on reducing some ESG risks, which are most likely to harm the corporation’s reputation and thereby prevent a crisis. Such risk assessment can identify the potential sources, scenarios, and impacts of issues and crisis, so that the corporation using its ERM framework, can develop and implement a crisis management plan, which defines the roles, responsibilities, and actions of its crisis team in the event of a crisis.

2. Development and Implementation of an Effective ESG Strategy and Policy Document

It is important that a corporation develops a strategy that aligns with its vision, mission, and values, and addresses the expectations and needs of its stakeholders to mitigate ESG reputational risks. A corporation looking to mitigate ESG reputational risks would need to define and implement clear policies and procedures to achieve this. A clear vision, mission, and values can help the corporation communicate its identity effectively, differentiate itself from competitors, and align its actions with its expectations.

3. Integrating ESG Considerations into the Corporate Culture, Governance, and Decision-Making Processes and Ensuring Accountability and Oversight at all Levels

Another key step to mitigating ESG reputational risk is to build a strong corporate culture and ethical standards, which foster a positive and respectful work environment. It also guides the corporation's decisions and behaviors as part of the corporation’s ERM. A strong corporate culture and ethical standards with defined core values and expectations can help a corporation comply with laws and regulations and enhance its reputation and trustworthiness. It can also help the corporation motivate and empower its employees, thereby reducing its ESG reputational risks. Regular trainings and continuous education on ethics and compliance of all employees, rewarding ethical behavior and performance and implementation of consequences for ethical violations will improve a corporation’s risk management and mitigate ESG reputational risks.

4. Stakeholder Engagement

Engaging and communicating with stakeholders on a regular and transparent basis and responding to their feedback and concerns is an essential tool for managing ESG reputational risk. A crucial step to mitigate ESG reputational risk is to implement stakeholder engagement as part of a corporation’s ERM. By listening to stakeholder’s feedback to understand their concerns, developing an engagement plan which defines the objectives of these engagements, corporations can in turn enhance their organizational reputation. The collection and analysis of these feedback from stakeholders are applied towards improving the products, services, processes, or policies of the corporation. Engaging with stakeholders and listening to feedback can help the corporation build and maintain strong relationships, enhance its reputation and credibility, and identify and address potential issues and opportunities.

5. Monitoring and Responding to Emerging Issues and Crisis

A crucial step to mitigate reputational risk is to monitor and respond to emerging issues and crises, which can pose a threat or challenge to the corporation's reputation, operations, or performance. Emerging issues and crises can be internal or external and can range from minor incidents to major disasters. Monitoring and responding to emerging issues and crises can help corporations prevent or minimize the negative impacts, protect its reputation and stakeholders, and recover and learn from the situation. Corporations must establish and maintain a crisis communication plan, which defines the key messages, audiences, and channels of communication. This can be done using various tools and techniques to monitor the internal and external environment, such as media monitoring, social listening, or stakeholder feedback. Ultimately, a corporation must act quickly and communicate clearly to address issues of reputational risks to restore confidence and trust in the corporation.

ESG reputational risks pose significant challenges for corporations as they have the potential to rapidly escalate, resulting in damage to a corporation’s brand, image, and financial performance regardless of its prior track record. However, by integrating the outlined ESG metrics into a corporation’s ERM framework, and by defining a clear vision, mission, and values, developing a robust corporate culture with ethical standards, actively engaging with stakeholders, proactively monitoring, and addressing emerging issues and crises, and leveraging positive publicity and social responsibility initiatives, corporations can enhance their ESG reputation and resilience. By doing so, corporations can effectively pursue their business objectives while mitigating the impact of ESG related risks.

At Adcax Nominees Limited, we pride ourselves in supporting our clients' business in navigating the intricate landscape of corporate governance. From navigating regulations to establishing sound structures ensuring seamless compliance, our expert team is here to guide you every step of the way. Let us ensure your business operates with transparency, accountability, and long-term success in mind. Reach out to us today via email at adcaxnominees.nigeria@dentons.com to learn how we can assist with your corporate governance compliance issues.

1. The Importance of Brand Reputation: 20 Years to Build, Five Minutes to Ruin

2. Deloitte 2014 survey on reputation risk

3. Why investing in sustainability is a smart business move