Against the backdrop of a global climate crisis, investors, rating agencies, banks and various other stakeholders are looking beyond traditional financial factors to understand company values and their commitment to sustainable growth. This shift is evident as the number of signatories to the UN-backed Principles for Responsible Investment (PRI) increased to 3657 at the beginning of 2020, representing $90 trillion in assets under management, compared to the 63 signatories in 2006 and the evolution of global reporting standards such as SFDR, TCFD and upcoming standards such as IFRS and TNFD. The importance of sustainable practices is also felt in the consumer market, as studies show that 66% of global consumers are willing to pay more for sustainably produced products. This market and societal shift towards sustainability is reflected in the increasing demand for companies to focus on Environmental, Social, and Governance (ESG) goals.
With the increasing value placed on ESG goals and sustainable practices, companies face greater pressure to manage their ESG risks and disclosures effectively. Failure to do so has led to a sharp increase in ESG controversies worldwide. These controversies go beyond just causing reputational damage and severely impact a company’s top and bottom lines.
What are Environmental Controversies?
Environmental controversies refer to issues or events associated with a company, causing environmental harm through its operations, products, or services. These controversies can be related to a wide range of climate or environmental impacts, such as oil spills, water sourcing, water pollution, deforestation, tailings from mining, untreated organic waste disposal, greenhouse gas emissions and toxic emissions, among others.
One of the most notable environmental controversies in this regard is the 1989 Exxon Valdez oil spill. The spill occurred when an Exxon-owned oil tanker ran aground on Bligh Reef in Prince William Sound, Alaska, releasing about 11 million gallons of crude oil into the ocean. The spill caused severe damage to the ecosystem, killing a significant number of marine animals, including 40% of sea otters living in the sound. It also had a devastating impact on the local fishing industry, which relied heavily on the region's clean waters. The incident led to a series of legal and financial settlements, with Exxon having to pay one billion dollars in criminal fines and civil damages.
Another notable example is Vedanta’s Sterlite copper plant controversy. The copper plant in India was shut down by the Tamil Nadu State Pollution Control Board (TNPCB) due to allegations of toxic gas emissions. The plant was accused of violating environmental norms and emitting sulphur dioxide, which is harmful to human health and the environment. The plant had been facing opposition from local residents and activists for several years, who had raised concerns about pollution and health hazards. The financial implications of this were severe as the supreme Court imposed a penalty of $12 million on the company for polluting the environment and also shut the plant down for a very long time.
With vigilance from state authorities, judicial bodies, NGOs and media increasing, such controversies are on the rise, with an increasing number of companies being found guilty of causing environmental damage or not disclosing the impact they have on the environment. Every country across the globe is seeing a rising tide of litigations related to environmental violations, affecting a company’s reputation and investment value. In this regard, a $10tn (£7.9tn) investor alliance recently accused over 700 companies (including Amazon, Tesco and ExxonMobil) of not revealing their impact on the environment.
Assessing the impact of environmental controversies on businesses
These controversies have a wide-ranging impact, from causing reputational damage to economic losses. Some of the notable financial impacts of environmental controversies on businesses in this regard are:
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Impact on consumer loyalty: The rising number of companies being found to over-inflate their environmental credentials has triggered a crisis of confidence in investors and consumers alike. Controversies do not just harm a company's reputation but also impacts customer loyalty. For instance, the impact of greenwashing on consumer loyalty and satisfaction is elucidated in a study undertaken by Shift Insight which revealed that greenwashing could result in a loss of revenue as 48% of the respondents said that they would shop less from a company found guilty of greenwashing while another 14% said they never purchase from the company again. Thus loss in consumer confidence often translates into financial losses. Learn more about Greenwashing and how it impacts businesses in our blog.
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Loss in investor confidence: When a company becomes embroiled in environmental controversies, it can negatively affect the ESG evaluation process, causing a loss in investor confidence. ESG rating agencies collect data on controversies and evaluate their severity, providing insights into underlying problems within a company's operations and governance, which tend to be indicative of broader problems within a firm. For example, institutional investors, including BlackRock, State Street Global Advisors, and T.Rowe Price, monitor these controversies to assess potential risks and inform their proxy voting decisions. It could also impact passive investments as ESG indices also consider controversial ratings for index inclusion. As a result, environmental controversies can have significant consequences for a company's financial performance and its ability to attract investment capital.
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Investor divestment: Due to ethical considerations, concerns of regulatory risks and reputational damage, investors may choose to sell their holdings in the company. For example, Norges Bank Investment Management, which runs the assets of the sovereign wealth fund, announced in May 2020 to exclude Vale SA, a Brazilian mining company, from its investment portfolio "due to an unacceptable risk that the company is contributing to or is itself responsible for serious environmental damage.” This decision was prompted by the collapse of a Vale-owned tailings dam in Brumadinho, Brazil which led to a catastrophic release of mining waste, killed hundreds of people and caused extensive environmental damage. Vale SA has also been involved in other environmental controversies in the past, such as the 2015 Mariana dam disaster.
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Penalties and legal costs: If found guilty, companies involved in environmental controversies may also face costs associated with fines, penalties, and legal fees. For example, six companies in China have been ordered to pay approximately $26 million in fines for discharging waste acid into two waterways in eastern China. Likewise, in the case of the 2010 Deepwater Horizon Oil Spill, when an offshore oil rig exploded, causing millions of barrels of oil to spill into the Gulf of Mexico, the agreement carried penalties and fines amounting to over $4.5 billion to the company.
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Operational disruptions: Environmental controversies can also disrupt a company's operations, as environmental controversies such as oil spills, toxic waste, or pollution can lead to production shutdowns and damaged equipment. This disrupts operations as it impacts productivity and causes delays. These operational disruptions can result in additional costs, loss of revenue, and damage to the company's reputation, which can have long-term consequences for its financial performance and competitiveness in the market.
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Financial challenges: By impacting a company's perceived creditworthiness, as it may indicate high associated risks, it can lead to difficulty in accessing capital from investors. Thus, lenders may charge higher interest rates or demand more stringent borrowing terms to compensate for the perceived risks. Likewise, investors too may demand higher risk premiums. In addition, environmental controversies are found to impact a company's long-term growth. A study assessing 141 serious ESG incidents found that 49% resulted in slower revenue growth and 24% produced a revenue decline.
Staying clear of these controversies may also offer many benefits. For example, by incorporating climate intelligence into their ESG strategies, companies can handle environmental risks and opportunities more effectively and position themselves for long-term success in the transitioning low-carbon economy. Moreover, companies with good ESG ratings tend to have fewer legal or financial liabilities, better stakeholder relationships and a good reputation, making it easier to raise capital. In this regard, research has demonstrated that these factors result in better financial performance.
How are ESG controversies scored?
ESG controversies are scored by rating agencies based on the perceived impact of the incident. The severity of it, which is often marked on a scale ranging from minor to very severe, is evaluated using a range of factors. This includes the number of people affected, the land area impacted, the impact duration, fines imposed, and the potential reputational risk to the company and its investors. In addition, the level of public attention it receives can also influence its severity rating. Certain incidents that impact vulnerable groups, such as indigenous people, or protected environments, like oil spills in conservation areas, tend to get immediately categorised as severe or very severe.
Nipping at the Bud: The Need to Address Controversies Before They Erupt
The analysis above provides tantalising examples of the significant losses that could have been avoided by better understanding the company's environmental risks and addressing them early on. Thus, it is important to track controversies before they erupt.
While many environmental controversies are caused due to deliberate malpractices, it is important to note that these controversies can also occur accidentally. This could be due to equipment failures, human errors or natural disasters. For instance, the 2010 Deepwater Horizon oil spill, which had a severe impact on the ecosystem of the Gulf of Mexico, including damage to marine life, wetlands, and beaches, was caused by an accidental explosion on the oil rig.
Whatever causes environmental controversies - deliberate or accidental, they have an impact on the investment value of the firm as well as the sector and, in some cases, of a country’s entire economy.
Leveraging Satellite Technology to Manage Environmental Controversies
The need for better risk management is articulated perfectly by Barbara Porco, the Director of the Center of Professional Accounting Practices at Fordham Business School, who said: "All elements of ESG reporting are really based on proper risk management. You cannot manage your risk if you don't know what your risk is. It's the risks that you don't know about that will be the problem, and you cannot do that without a data-driven and tech-enabled risk management approach."
Continuous monitoring, thus, is the best way to manage these risks before they spiral out. Satellite technology can play an important role here as it is an effective way to reduce the impact of environmental controversies. By providing real-time monitoring of environmental conditions, such as air and water quality, it can help companies detect and respond to environmental incidents quickly.
Satellite technology can be used to:
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monitor oil spills
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detect emissions with precision from smoke stacks of power plants, refineries, steel plants and cement plants
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detect pollution in water bodies before they hit domestic consumption
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measure bio-diversity of flora, area of afforestation in a time series, especially near large plants and mining areas
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detect harmful emissions from land fills and untreated organic waste and many more.
By detecting harmful incidents early on, it enables companies to undertake damage-control efforts that can minimize the impact on the environment. This can help companies reduce their risk of fines, litigation, reputational damage, and regulatory scrutiny while also improving their environmental performance and contributing to a more sustainable future.
Such monitoring can also help rating agencies, investment firms and commercial lenders like banks by providing advance warnings and helping them in their analysis and protecting investments and credit exposures.
Read our blog “EO and the future of ESG investing” to learn more.
Satellite technology is also revolutionising the carbon offset markets. By providing high-resolution data from space, it enables improved and independent supervision of carbon sequestration across forests and agricultural sectors. By providing detailed information on these activities, satellite data can capture the impact of emissions reduction measures. This allows companies to verify the legitimacy of a project's claims and be confident in the integrity and reliability of their carbon offset projects, minimising the risk of environmental controversies. Read our blog to learn more about how satellite-based MRV helps in bridging the trust deficit in the carbon market.
Geospatial technology can also help regulators identify potential violators of sustainable norms and secure targets for engagement.
🛰️ However, while geospatial data presents itself as a near-perfect solution, it requires sophisticated models to cull out useful insights from its raw form. Organisations with strong analytical skills and computational capacity play an important role in consolidating these valuable data from various sources and disseminating them through APIs.
Monitoring and Minimising Environmental Risks with Blue Sky Climate Intelligence
At Blue Sky Analytics we leverage AI, cloud computing, and satellite technology to provide climate intelligence solutions that can help companies prevent environmental controversies before they occur. By enabling continuous monitoring, we can identify potential environmental risks and provide actionable insights that enable you to make data-driven decisions and minimize the impact of environmental controversies. Learn more about our datasets here.
Our vast-array of climate intelligence can be accessed via our user-friendly platform SpaceTime™ and accessible and easy-to-connect APIs. With our cutting-edge technology, we can help your company stay ahead of the curve, enhance your ESG performance, and avoid financial losses.
