Let’s imagine that we reached 2030 and that climate change was not adequately regulated, because such measures did not generate votes in Europe, and there was also corporate lobbying to postpone regulation. However, extreme weather events, such as heat waves, droughts, floods and storms, are becoming increasingly frequent and severe, making communities more vulnerable and subject to the economic, financial and social impacts that these events entail (loss of assets, investment needs, reduced productivity, work accidents, increased operational and value chain costs, more expensive insurance, etc.). Companies located in these most vulnerable regions are forced to prepare to anticipate and deal with the occurrence of climate events, leaving them solely with the need to obtain knowledge on how to incorporate climate and social risks into their operational risks and business continuity systems. Without a robust regulatory framework, organizations will have to deal with these issues on their own, which represents a significant challenge for company management, especially for SMEs.
In this scenario, and continuing what we can already see developing, weak social regulation implies that certain issues of human rights and workers’ well-being are not prioritized, resulting in an increase in stress and dissatisfaction in the workplace, impacting the company’s productivity, morale and social stability. Therefore, companies will also be responsible for taking care of the health and well-being of their employees, in order to guarantee internal social peace that compensates employees for the reduction in social protection resulting from the reduction in regulatory developments.
Companies therefore face a series of challenges in this context. Climate risk management becomes a complex task that requires investment. Organizations need to invest in knowledge, processes and access to technologies to monitor and mitigate the impacts of climate change, which can require significant capital. Furthermore, adapting to new climate realities can lead to substantial financial losses, especially for sectors such as agriculture, tourism, transport, forestry, with consequences for the insurance sector.
Corporate social responsibility is expanded. Companies must create work environments that promote employee well-being. This includes the implementation of mental health policies, psychological support programs and initiatives that promote inclusion and diversity. Ignoring these issues can result in high employee turnover, damaged brand reputation and lost productivity. With the aging of the population so present in Portugal, the early departure of more senior employees due to psychological exhaustion and the high turnover of younger employees, leads to the loss of acquired knowledge and losses in productivity.
Taking these challenges into account, there is a purely financial and economic logic in integrating ESG (environmental, social and governance) practices in companies, as they can not only mitigate risks, but also reduce operational costs, improving the company’s resilience, thus leading to increased productivity, or at least its non-decrease. Furthermore, promoting a corporate culture that prioritizes employee well-being can result in a more engaged, loyal and productive team. Training programs focused on mental health and work-life balance are essential for companies to be able to have balanced employees with reinforced individual resilience, in a changing, unpredictable, aggressive and tending to belligerent social context. Only in this way will it be possible to avoid the early departures of exhausted experienced employees, the immediate departures of dissatisfied young people and to reinforce top management capable of looking beyond the pressures of quarterly data.
This is the very plausible scenario that we could experience in 5 years. It is this scenario that, in Europe and the USA, seems to be what is desired, taking into account the wave of satisfaction that exists in the business sector with the idea of relaxing climate and social regulation on companies. But let’s not be shortsighted: regulation also exists, and mainly, to protect some parties involved in the issue. ESG regulation essentially exists to protect companies from their own shortsightedness in only worrying about short-term issues. Without regulation that forces companies to think beyond next year, companies are vulnerable to risks that they refuse to see today. This cognitive bias in the minds of managers, in refusing to see new realities that challenge the status quo, is very well studied in the literature. ESG regulation came to help managers stop being myopic and not so biased. But it appears that myopia and biases are being imported from the US and gaining traction in Europe. The good news is that in other parts of the world – Asia and Africa – myopia and bias in undervaluing sustainability issues is not increasing, on the contrary. Maybe it’s time to look at what’s happening in other parts of the world, and stop being so biased with the idea that Europe is at the center of the world, and that China doesn’t care about EGS issues.
PhD, CEO da Systemic