Five sustainability trends to monitor to avoid potential risks

Published: Wednesday, 18 March 2020 10:28

As demand for business to demonstrate its sustainability credentials grows, companies are being held accountable by consumers, investors, regulators and other stakeholders and increasingly face reputational damage or legal liabilities if they fail to appropriately manage ESG issues. Allianz Global Corporate & Specialty (AGCS) has identified five key trends that will impact businesses’ ESG footprint in 2020 and beyond: climate change, water management, biodiversity degradation, exploitation in the supply chain and increasing scrutiny on corporate governance:

Address climate change in business strategy

Combatting climate change is the key challenge of the coming decade. It ranks 7th in the Allianz Risk Barometer 2020 – its highest-ever position – and is already affecting businesses in many ways, such as an increase in physical losses from more severe weather events or potential market and regulatory impacts such as carbon-emissions offsetting. There are also litigation risks as climate change cases targeting ‘carbon majors’ have already been brought in 30 countries around the world, with most cases filed in the US.

Ensure access to fresh water for communities

By 2050, the world’s population is expected to reach 9.7 billion – while global water demand is expected to increase by 20 percent to 30 percent, mainly due to demand in the industrial and domestic sectors. Currently over two billion people are living in areas of high water stress and almost half of the global population – about four billion people – experience severe water scarcity during at least one month of the year.

Agribusiness and farmers, thermal power plants, textiles and garment manufacturers, meat processers, beverage manufacturers, mining and automotive manufacturers are some of the most water-intensive sectors demanding abundant, safe water but how companies treat such resources is coming under increasing scrutiny. Today, more than ever, companies are expected to protect water resources, prevent pollution and reduce their consumption through modern water management practices. Rethinking existing water supply models can benefit local communities and release water stress in certain areas. Growing population and climate change leading to an increase in severe weather events only add to the drought dynamic. Thus, governments, society and corporates should cooperate to address this challenge.

Protect biodiversity and finite resources

Oceans full of plastic waste, species extinction and severe land degradation due to storm, drought or increasing industrialization, as demonstrated in the felling of the Amazon rainforest, are just some of the most obvious examples of the deterioration of the planet. Sustainable consumption practices can slow future biodiversity loss.

In response a growing number of companies are adopting so-called ‘circular economy’ strategies with the aim of no longer allowing products to become waste after their use. Instead, they are reintroduced into the production cycle as secondary raw materials. Products made of secondary materials range from leftover food to building materials from scrap tires. Many consumer goods companies launch take-back and recycle programs or reprocess used materials for usage beyond their own products.  

Prevent human right violations in supply chains

Human exploitation can take on many forms in the business environment – forced labor, child labor or insufficient labor standards – and it can be difficult to detect in today’s global supply chains. It is estimated that around 40 million people are trapped in modern slavery globally. Industries such as textiles, food and agriculture, electronics, sports, construction, or hospitality have been connected to modern slavery, although all sectors are vulnerable.

More enforcement in the area of human rights and holding directors responsible for transparency in supply chains is gaining traction. Corporations that fail to take appropriate steps to eliminate human exploitation from their supply chains could face shareholder derivative suits, more directors and officers (D&O) claims and reputational risks. 

Governance issues continue to demand business diligence

Businesses and their directors are under increasing pressure to maintain sound corporate governance, as more investors, in evaluating a company, hold it up to ESG standards. Acts of corporate misconduct such as bribery or corruption, inadequate handling of data privacy, financial misconduct and money-laundering have all made headlines in recent years. 

Having inclusive institutional structures in place for multi-stakeholder dialogue and cooperation is essential to ensuring good governance and compliance practices. Good governance relates to systems that enable and ensure accountability, transparency, legitimacy, public participation, justice and efficiency.

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