Three examples of what can happen when companies underestimate ESG risks
Environmental, Social and Governance (ESG) criteria play an increasingly important role in the strategy of companies. In many cases, this is a response to the increased demand for ESG investments and the explosively growing market for sustainable products and services. So it’s a matter of going with the market. Nothing wrong with that in itself, but it does ignore the real value of having your ESG policies in place. Not taking environmental, social and governance risks seriously can have disastrous consequences for even the largest companies. Here are three examples of major ESG failures in recent history.
European energy companies lose 130 billion euros
It has been clear for decades that continuing to burn gas and coal to generate electricity is not ecologically sustainable. Nevertheless, large European energy companies such as the German Eon continued to invest heavily in the construction of new coal and gas-fired power stations until a few years ago. Financially, this seemed more interesting than investing in renewable energy sources. However, the ecological risks they took for granted also turned out to entail a major financial risk. Cost: 130 billion euros.
Utilities had not taken into account the energy transition, which accelerated from 2011 in Germany in particular. As a result, the supply of green energy increased much faster than expected, causing the wholesale price for electricity to plummet. As a result, the value of those new power plants plummeted just as quickly, and companies like Eon were forced to write off billions on those plants. In the end, Eon even sold all gas and coal plants and lost three quarters of its business value.
The advantage of turbocharged diesel engines is that they are relatively economical and therefore emit less CO2 compared to petrol engines, while they offer just as good performance. A disadvantage is that such engines emit far too many toxic substances to meet the emission standards. So what do you do if you are CEO of Volkswagen and want to sell cars? Do you take the law and the health risks for your customers and their environment seriously and do you develop cars with a different engine? Nope, Volkswagen was fully committed to ‘Clean Diesel’ and equipped its cars with cheating software, so that during testing it was hidden that the cars were anything but clean under normal conditions.
As is well known, the company had to admit in September 2015 that it had deliberately cheated, circumvented the law and thereby endangered the health of millions of customers. The consequences were dramatic for all stakeholders. Shareholders lost $42.5 billion in two months. Volkswagen has had to pay tens of billions in damages and fines to customers and dealers. And some of the lawsuits, including against the CEO in Germany, are still ongoing. Although Volkswagen has recovered nicely thanks to a thorough restructuring at the top and a completely new strategy, the company has never become as valuable as before dieselgate.
Meta (former Facebook)
Meta Platforms, the parent company of Facebook, Instagram and WhatsApp, proves that neat ESG ratings are anything but a guarantee to stay out of trouble. In 2021, the leading American ESG research firm Just Capital placed Meta in 21st place of companies that perform best on ESG. In 2022, Meta has taken a nosedive, ranking in 712th place, while surveying ranks as one of the best employers (2nd in the industry) in the US, and the very highest ranking of any internet company in the field. of environment. What is going on here?
It’s a complex story with many chapters, but the bottom line is that in recent years, Meta’s leadership has opted time and again for growth and money over making ethical decisions regarding the protection of safety and security, privacy of its users. As a result, it is constantly in conflict with legislators and has suffered considerable image damage.
The consequence of all this is that a snowball effect has arisen that now also has disastrous financial consequences. Users ignore the platforms and legislators restrict the collection of data. This threatens to make Meta a lot less interesting for advertisers, so that it will lose a lot of its income. In recent weeks (February 2022) we have seen that investors also chose eggs for their money, as a result of which the share lost no less than forty percent of its value in two weeks. Converted, Facebook has become worth a sloppy $ 400 billion less.