A common criticism of ESG is that environmental, social, and governance issues are separate matters that require separate consideration. However, a recent paper from the University of Cambridge Institute for Sustainability Leadership calls this conventional wisdom into question. These authors argue that environmental and social risks often occur concurrently, and that current risk management frameworks underestimate the impacts of this overlap. The paper discusses this concept, stating:
“The intersection of environmental and social risks has a financially material influence on the resilience of investment portfolios over time. Physical climate impacts, transition pressures and nature-related degradation affect asset values, cash flows and portfolio volatility. What is increasingly evident, but remains underpriced, is that these environmental risks rarely materialise in isolation. They interact systematically with social and economic vulnerabilities (such as inequality, labour conditions, access to finance, etc) to amplify losses, delay recovery and transmit shocks through markets and financial systems.”
The paper examines these risks in the agricultural sector, but its takeaways apply to the larger economy. When a climate event occurs, standard risk management practices may account for damages to a facility and the expected downtime before it can become operational again. However, this analysis may miss the impacts on the labor force, who may be displaced, injured, or otherwise unable to return to work. This is one example of how climate and social issues can intersect. The paper notes that these intersections can result in devastating “feedback loops” that deepen the severity of both climate and social impacts. The authors provide a framework for analyzing simultaneous climate and social risks, which may help companies plan for and mitigate the worst impacts.
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