ESG: The 5th Element of Corporate Risk Assessment

Abstract

To ensure continued growth and profitability, corporations regularly scan four types of risk: business/financial risk, political/economic risk, legal/compliance risk, and cyber/security risk. A key aspect of good corporate governance calls on boards to identify, assess, and develop plans for the officers to neutralize or mitigate such threats to the company’s bottom line. Today, Environmental/Social/Governance (ESG) risks have joined this group. Just as the four classic elements of Greek antiquity (earth, wind, fire, and water) presented both opportunity and danger for any undertaking, an elusive fifth element was much more difficult to ascertain: quintessence.

ESG has become that fifth element for corporate boards in Western societies. Just as elusive as quintessence, boards are unsure about what ESG actually is, and even more uncertain about how to plan for it. Unlike the other four elements, ESG is less readily quantifiable. This Article offers insight for boards to conceptually grapple with ESG as the new fifth element of risk assessment, offering a case study of Nestlé USA’s failure to appreciate ESG’s migratory nature: what initially appeared as supply chain risk moved across pillars into litigation and business risks before settling as ongoing ESG risk proper.

Keywords: ESG, corporate board, risk assessment, climate change, nestle, child labor, human rights, environment, environmental protection, diversity, governance, social, shareholder, securities, corporate board, corporate officers

JEL Classification: G3, G18, G30, G32, G38, L2, M1, M14, M16, K22, K32