According to the World Economic Forum's annual global risk rankings, the top-five dangers companies face when they do business are:
・ Water crises.
・ Failure to adapt to climate change.
・ Extreme weather events.
・ Social instability and inequality.
The disclosure of serious problems can lead to fines, sanctions or the loss of brand equity. Company CEOs have no alternative but to be mindful of how they work out "intangible assets" on their balance sheets. They have the potential to cause long-lasting financial and reputational damage.
Sustainability threats
Scientists have now reached a consensus that a large number of health risks are concentrated in a small number of industries. While coal-fired power stations remain the biggest source of global carbon emissions and a major driver of climate change, in the US some of the most toxic and carcinogenic chemicals are emitted from aluminum and cement industries.
Increasingly, environmental and health issues in certain sectors pose real economic threats to corporations. This in turn damages shareholder value. While a company can attempt to reduce this problem by altering production methods or product design, it can often be hard to achieve in a global supply chain.
Rewards on offer
Safe and efficient factories reduce insurance costs, create superior working environments, and produce higher-quality products that are bought by consumers.
Due consideration of risks and opportunities create value for shareholders and local communities alike. Research on the gold mining sector showed that miners gained financially if they had a track record of positive engagement with communities.
Indeed, the breakdown of relationships with communities have often resulted in mines being shutdown or crippled by production delays.
Non-financial indicators of success are not obvious, and environmental and sustainability issues can be hard to present in financial statements. That is precisely why they can be a crucial factor for active investment managers who know how to find and measure them.
The author is equity strategist of UBS Global Asset Management.
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