Elon Musk recently called for miners as he needs a lot more nickel for Tesla batteries, and that he would need it created ethically (efficiently and in an environmentally sensitive way), raising both a challenge and an opportunity.

We are speaking about business risks, challenges and opportunities linked to environment, social and the governance (ESG) criteria.

We cannot pretend ESG risks do not exist. As Cary Krosinsky (from NYU Stern) and Patrick Reed reported in a recent article in September 2020, and referring to Jyoti Banerjee, founder of North Star Transition, “ESG is popular… because it limits the risks that investors face in non-financial matters. Sadly, the reality is that even if all current investing were to shift to an ESG approach, our global system would continue to be degenerative, threatening life on earth. That’s not risk management – that’s pretending the risks don’t exist”. 

This leaves us to act in a transformative way towards People, Nature and the Planet.

On the risk side, the issue is how to understand companies’ dependence and impact on risks, and I am stressing climate-change and environmental risks as urgent, in a positive attitude to be increasingly aligned with the Paris Agreement of the 1.5º C temperature limit and the seventeen Sustainable Development Goals.

There are many frameworks for assessing the ESG risks of a company but one of the most robust is the TCFD one (from the Task Force on Climate-Related Financial Disclosures), which considers four key dimensions: Governance, Strategy, Risk Management and Metrics and Targets. The focus is on the financial impact ultimately at the level of the Cash-Flow Statement, Income Statement and Balance Sheet, of both Transition Risks (Policy and Legal, Technology, Market and Reputation) and Physical Risks (Acute and Chronic). Hopefully this assessment will ultimately contribute to quantitative considerations on companies’ capital adequacy and the cost of funds, among others.

Sooner or later externalities will be accounted for in the value of a company’s assets and in the return of those assets. 

Many academies and standard setters are already progressing in the field of, e.g. Impacted Weighted Accounts (Harvard Business School),  and we expect that new international accounting principles and procedures will be developed so that investors, consumers and other stakeholders can know the real value of a company and finally will be able to compare assets based on their true value, i.e. with ESG impacts incorporated. 

In terms of challenges and opportunities I would continue to refer the TCFD report framework as it offers five dimensions for assessing a company’s opportunities: Resource Efficiency, Energy Resource, Product/Services, Markets and Resilience.

A recent article from McKinsey (McKinsey, Climate math: What a 1.5º degree pathway would take, April 202o) increased business opportunities to comply with CO2 removal so as not to exceed 1.5ºC could be derived from the following needs: 

  • in food (new cultivation methods, change the mix of proteins in consumption, reduce food loss and waste), 
  • reduction of deforestation,
  • reduction in transport emissions with a series of decarbonized solutions, 
  • change in the space and water heating systems in buildings, namely by increased electrification from renewable energy,
  • reduction in methane emissions namely by the oil and gas, cattle and dairy, coal mining and waste industries, 
  • increase in industrial efficiency by engaging in the circular economy, reduce fuel consumption, and use new materials with less carbon intensity,
  • reduce fossil-fuels, the highest contributor to CO2 emissions, namely by substituting fossil fuel based heating by renewables generated heating in industries such as in construction, food, textiles and manufacturing, 
  • decarbonize power and fuel, shifting generation from coal and natural gas to renewables, developing green hydrogen among others,
  • develop carbon capture, use and storage systems.


Regarding the prospects of return from the ESG-based business opportunities, an article from Morgan Stanley (MS Institute of Sustainable Investing) states that research conducted on the performance of 11,000 funds from 2004 to 2018 shows that there is no financial trade-off in the returns of sustainable funds compared to traditional funds, and they demonstrate lower downside risks.

I would conclude by saying that consumers and shareholders are increasingly pushing companies to incorporate ESG criteria into their long-term strategy. Following a Morningstar report last February, “more people and more investors are realizing that global warming is a crisis bearing down on us, with significant societal and investment risks. And more people and more investors are realizing that corporate short-termism and focus on shareholder value has not created enough shared value and that a shift toward long-termism focused on creating value for all stakeholders will create more value for both shareholders and society over the long run.”

Have a great and impactful week!

Conceição Lucas
Professora de Sustainable Finance
Católica Lisbon School of Business & Economics

This article refers to edition #59 of the "Have a Great and Impactful Week" Newsletter.
Subscribe here to receive the weekly newsletter