ESG: Preparation supervision meeting – part 2

The consequences of individual extreme weather events as well as long-term changes in climatic and ecological conditions. Physical risks can also have indirect consequences (breakdown of supply chains; abandonment of water-intensive business activities to climate-induced migration and armed conflict).

Similarly, companies that have promoted climate change could be responsible for governmentally (e.g., Ontario Bill 21, Liability for Climate-Related Harms Act, 2018) or judicially consequences.

Existing in connection with the transition to a low-carbon economy: Political measures can lead to an increase in the price / shortage of fossil fuels or emission certificates (examples: coal phase-out, CO2 tax) or to high investment costs (refurbishment of buildings / plants).

New technologies can displace familiar ones (example: electromobility), changing preferences of contractual partners and societal expectations can endanger companies that have not adapted.

Interdependence between physical risks and transition risks

Events, developments or behavior that are attributable to the areas of social affairs and corporate governance may have a negative impact on the net assets, financial position and results of operations of a company if the probability of their occurrence is not sufficiently factored into the measurement of the assets or liabilities affected.

Reputational impacts are possible in the process.

Social risks are also characterized by negative effects on stakeholders of the company.

Examples: Successful claims for billions of dollars in damages against manufacturers of cigarettes; building permit for a large-scale project fails because the land rights of indigenous inhabitants were not taken into account; fines paid for evaded taxes or wrongfully received refunds

Effects on the reputation of regulated entities

Reputational risks are a key aspect of sustainability risks. On the one hand, there is a financial loss potential in the above context as an additional consequence of events, developments or behavior that occur.

On the other hand, supervised entities are also exposed to a potential loss of the occurrence of specific events, merely by virtue of maintaining a business relationship with an entity that may be exposed to a sustainability risk.

Failure to carry out sufficient sustainable external and internal activities, which can result in a loss of trust among contractual partners and employees, potentially poses a significant reputational risk.