Three examples of what can happen when companies underestimate ESG risks
Environmental, Social and Governance (ESG) criteria are playing an increasing role in corporate strategy. In many cases, this is still a response to the increased demand for ESG investments and the exploding market for sustainable products and services. So it is a question of moving with the market. Nothing wrong with that in itself, but it ignores the real value of having your ESG policy in order. Indeed, not taking environmental, social and governance risks seriously can have disastrous consequences for even the largest companies. Here are three examples of major ESG fiascos from recent history.
European energy companies lose 130 billion euros
It has been clear for decades now that continuing to burn gas and coal to generate electricity is ecologically unsustainable. Yet until a few years ago, large European energy companies like Germany’s Eon (and Nuon) continued to invest heavily in building new coal and gas power plants. Financially, this seemed more interesting than investing in renewable energy sources. However, the ecological risks they took for granted in doing so also turned out to involve a large financial risk. Cost: 130 billion euros.
Utilities had not taken into account the energy transition, which gained momentum starting in 2011, particularly in Germany. As a result, the supply of green energy rose much faster than expected, causing the wholesale price of electricity to plummet. As a result, the value of those new power plants plummeted just as fast, and companies like Eon were forced to write off billions on those plants. Eventually, Eon even sold all of its gas and coal plants and lost three-quarters of its enterprise value.
Dieselgate Volkswagen
The advantage of turbocharged diesel engines is that they are relatively economical and therefore emit less CO2 compared to gasoline engines, while offering equally good performance. A disadvantage is that such engines emit far too many toxins to meet emissions 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 to your customers and their environment seriously and develop cars with a different engine? Nope, Volkswagen went all in on “Clean Diesel” and equipped its cars with tampering software, hiding the fact during testing that the cars were anything but clean under normal conditions.
As is well known, in September 2015, the company had to admit that it had knowingly cheated, circumvented the law and thus endangered the health of millions of customers. The consequences were dramatic for all stakeholders. Shareholders lost $42.5 billion in two months. Volkswagen 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 pending. True, Volkswagen has recovered nicely thanks to a thorough restructuring at the top and a completely new strategy, but the company has never regained the value it had before dieselgate.
Meta (formerly Facebook)
That neat ESG ratings are anything but a guarantee of staying out of trouble is proven by Meta Platforms, the parent company of Facebook, Instagram and WhatsApp, among others. In 2021, leading U.S. ESG research firm Just Capital still placed Meta at spot 21 of companies that perform best on ESG. This year, Meta has taken a nosedive and can be found at spot 712, even though, according to research, it is one of the best employers (2nd in the industry) in the U.S., and even has the very highest score of all Internet companies on environmental issues. What is going on here?
It is a complex story with many chapters, but the bottom line is that Meta’s leadership has chosen growth and money over and over again in recent years instead of making ethically correct decisions regarding the protection of its users’ security and privacy. As a result, it is constantly at odds with lawmakers and has suffered considerable reputational damage.
The result of all this has been a snowball effect that is now also having financially disastrous consequences. Users are abandoning the platforms and lawmakers are restricting data collection. This threatens to make Meta a lot less interesting to advertisers, which means it will lose much of its revenue. In recent weeks (February 2022) we have seen investors also take their chances, causing the stock to lose as much as 40 percent of its value in two weeks. This left Facebook worth a sloppy $400 billion less. Painful!