Environmental, social and governance (ESG) is gaining greater interest with investors who are evaluating how companies mitigate these risks to ensure their long-term sustainability as a business.
Most companies have plans to identify and manage normal Enterprise Asset Management (EAM) operating risks. But considering the potential occurrence of ESG risks a company might face is just as important. Even though predicting events such as hurricanes, pandemics and violations of regulations are difficult, being prepared or mitigating the impact can avoid the potential for devastating effects on an asset-intensive organization, as well as its employees and shareholders.
In this article, we will explore ESG risk factors and how maintenance operations play a critical role in ESG risk management and contribute to a company’s ESG investor evaluation.
“In 2020, the world learned a hard lesson: Despite our best-laid plans, we don’t know what is immediately around the corner.
In 2021, that lesson reinforces our view that a long-term, sustainable approach centered around strong environmental,
social and governance (ESG) principles is more important than ever.”
Let’s start with some definitions of ESG and what it means for maintenance operations. Wikipedia outlines Environmental, Social, and Corporate Governance (ESG) as an “evaluation of a firm’s collective conscientiousness for social and environmental factors. It is typically a score that is compiled from data collected surrounding specific metrics related to intangible assets within the enterprise. It could be considered a form of corporate social credit score…They are used for a myriad of specific purposes with the ultimate objective of measuring elements related to sustainability and societal impact of a company or business.” In essence, ESG is a measure used by investors to identify company resiliency, risks, and growth opportunities.
Breaking this down, the three evaluation categories cover:
Environmental – “The environmental portion of ESG considers how a company performs as a steward of the physical environment. The "E" takes into account a company’s utilization of natural resources and the effect of their operations on the environment, both in their direct operations and across their supply chains.”
Social – “How can a company manage its relationships with its workforce, the societies in which it operates, and the political environment? This is the central question behind the “S” in ESG investing — the social aspect of sustainable investing.”
Governance – “S&P Global assesses companies’ governance performance by assessing four factors: structure and oversight, code and values, transparency and reporting, and cyber risk and systems.”
The Role of Maintenance in ESG Risk Management
So how is this relevant to maintenance operations? Let’s evaluate in terms of the process of documenting ESG risks for investors.
Investors are trying to assess whether a company has “the means to address, the resilience and future sustainability of the corporation. A critical component of this is information about risk. Failure to furnish capital providers with a credible assessment of the risks that face the corporation not only increases uncertainty about expected performance and the long-term viability of the individual company; it also leads to an increase in the cost of capital and ultimately, a misallocation of society’s resources.”
The process for managing ESG risks is similar to the process for managing any other risks that may pose a threat to a company. However, different expertise, information and analytic tools may be needed.
In asset-intensive companies, maintenance operations can play a huge role in ESG risk management. Maintenance managers are already skilled at planning and implementing strategies to avoid equipment failures with both preventative and predictive maintenance. They can put these same skills to use to create plans and procedures to detect and respond to ESG risk events.
1. Identify Potential ESG Risks
The first step in ESG risk management is to identify all possible internal or external ESG risks where industrial maintenance would be involved from a creation, mitigation, or response perspective. Look into your own history of events and what others have faced.
Internal environmental risks to consider include hazardous materials management and emissions of toxic substances. External environmental risks include the impact of extreme weather on equipment and the ability to sustain operations. Terrorism is also an environmental risk to consider – both the physical risk to assets and the effect cyber-attacks could have on networks and data access. Some examples to consider:
- An Environmental Disaster – In April 2010, BP’s oil rig Deepwater Horizon exploded in the Gulf of Mexico, creating the largest marine oil spill in history which significantly impacted biodiversity. The cause was determined to be a faulty well construction plan. According to ESG Risk Guard, the total bill topped an estimated $65 billion between fines and cleanup costs, not to mention the hit that shareholders took.
- An Extreme Weather Event – Hurricanes, winter storms, excessive heat and flooding can take a heavy toll on equipment in normal times. But in February of this year, the state of Texas in the U.S. Southwest suffered a massive power failure. More than 5 million people were left without power. The Texas Tribune reported that “the most significant cause of the low power supply to the grid came from natural gas plants shutting down or reducing electricity production due to cold weather, equipment failures, and natural gas shortages.”
- An Energy Shortage – A shortage of energy can increase costs and reduce operating efficiencies. Today, the world is experiencing a global energy crisis. In Brazil, a historic drought has caused a severe reduction in hydroelectric power production. According to Bloomberg Green, “Brazil is on the edge of power rationing and major blackouts, and will need to rely heavily on importing supplies from Uruguay and Argentina until the rainy season starts and dams are replenished.” Besides the impact to the utility’s operations, any company reliant on a consistent supply of energy needs to have plans to deal with the situation for the sustainability of their operations.
Social risks could stem from internal labor issues, safety violations, or a product quality issue. An external social risk to consider is the violation of human rights from a member of your organization or a supply chain partner that reflects negatively on your company.
- Worker Shortage – The COVID-19 pandemic immediately disrupted the workforce and safety procedures. While employees in many industries could simply work from home, that was not the case for maintenance operations teams. Companies faced reduced asset maintenance, reduced personnel, and shutdowns. A Plant Services survey conducted in early 2021 found that as a result of the pandemic “A vast majority of respondents indicated that they needed both a stronger health and safety program and a stronger planning and scheduling program.”
- Unsafe Work Environment – Consider the company valuation ramifications due to lack of follow-through on safety standards landing a company on OSHA’s “naughty list”. OSHA’s Severe Violator Enforcement Program (SVEP) was created to “…effectively focus enforcement efforts on recalcitrant employers who demonstrate indifference to the health and safety of their employees through willful, repeated, or failure-to-abate violations of the OSH Act.”
- Food Contamination – Food and beverage companies need to consider the result of causing foodborne illnesses through improper food handling and contamination through manufacturing or distribution.
“Recalls and foodborne illnesses are 100% preventable. Incidents occur because of human error, and all it takes is one weak link to cause
serious — and potentially fatal — problems. That’s it. One weak link can cause the traumatic deaths and/or illnesses of customers,
and cost your company billions of dollars, loss of sales, plummeting stocks, negative media coverage and a severely damaged reputation.”
Francine L. Shaw, Foodborne Illnesses and Recalls on the Rise
Governance risks are generally evaluated around the corporate structure, principles, and processes. This includes how the values and policies set at the top cascade down into internal processes, documentation, and oversight to align company action to ESG value creation and risk management.
For operational teams, this would include the training, documentation, and follow-through to ensure that the company is following safety, and quality procedures. We’ve already highlighted a few examples where the result of poor governance can result in safety incidents and food contamination.
2. Prioritize ESG Risks
Not all ESG risks are equal. Risks should be evaluated based on both their likelihood to occur and the degree of potential disruption to operations. One way to conduct this evaluation is by using the Failure Mode and Effects Analysis (FMEA). This method ranks risk events for both probability and severity, allowing you to categorize risks as critical, vital, or secondary. Any number of methods can be used but the important thing is to consider the likelihood of ESG risks occurring, the degree of impact that would result from them, along with the root causes to determine mitigation strategies.
3. Develop Plans to Mitigate or Respond to ESG Risks
Unfortunately, normal preventative and predictive EAM maintenance strategies won’t protect companies from all ESG risks. That’s why it’s important to create plans and document procedures to respond to the occurrence of potential ESG risk events. Time and effort should be focused on the risks with the greatest likelihood of occurring and the greatest potential to disrupt operations.
For example, oil, gas and utility companies need to develop plans to restore power lines or pipelines in the wake of an earthquake or other natural disaster. These plans should outline procedures for items such as how employees get to remote locations, which assets are priority to address first, what additional equipment will be needed, and how will it be sourced.
As you look into planning for an ESG risk, evaluate whether you need to change your data collection processes in order to determine if you need to make investments to better detect or mitigate an ESG risk. Normal maintenance data on asset condition, asset usage and maintenance history can be useful in ESG risk analysis and mitigation plans if well-structured for analysis and insights.
4. Create Transparency Through Documentation
Developing ESG risk prevention and mitigation plans is important but so is documenting the plans. Documentation of your response procedures is proof to build investor confidence in your readiness and resiliency should the event occur. Of course, documentation is necessary for putting a response plan into motion. Key personnel should be familiar with the plans and know where to find them in a time of crisis.
Access to ERP systems anywhere, anytime, by anyone through mobile devices demonstrates readiness to respond quickly to any downtime event including an ESG-related event.
5. Contribute to ESG-Related Long-Term Investment Plans
The plan should disclose the ESG risks that have been identified and the response plans, as well as the data used to develop them. In addition, the plan should outline any investments needed to reduce risks or improve the ability to respond.
For example, the ESG plan could contain investment recommendations in smart plant technologies to predict and manage the resolution of high-priority risks. Some of the predictive technologies may seem like a luxury for day-to-day asset maintenance yet can prove to be critical for dealing with an ESG event.
Equipment sensors can provide critical indications of when an ESG event is occurring. For example, a sensor on a power line can alert maintenance operations of high wind speed. A sensor monitoring the temperature of outdoor equipment can trigger a work order if conditions become too hot or too cold before damage to the equipment occurs. Even simply monitoring if the equipment is on or off can help isolate needed repairs in the case of a terrorist attack or natural disaster.
“Continuing to rely on energy-hungry plants and equipment, for example, can drain cash going forward. While the investments
required to update your operations may be substantial, choosing to wait it out can be the most expensive option of all.”
Also consider the investment in environmentally safe and energy-reducing maintenance materials, and practices as part of your ESG plan.
Continually Monitor and Adapt Plans
“When new risks appear, or existing risks become more salient, it is inevitable that the company, regulators, shareholders,
creditors and other stakeholders with an interest in the long-term value of the company, will insist that these risks
are properly identified, measured, mitigated and disclosed.”
Creating an ESG response plan is a big undertaking but it’s important not to just put it on the shelf once complete. Plans should be monitored, reviewed, and updated on a regular basis to consider any changes in risks your company faces or likelihood of them occurring.
ESG planning and good governance in managing maintenance operations can make a material impact to the company’s environmental and social impact in normal times and in response to events. For ESG valuation by investors, your also need effective maintenance practices, planning tools, and documentation as proof of readiness and resiliency.
How Sigga Can Help
Here at Sigga, we have been helping asset-intensive industries with SAP EAM drive digital transformation and mobile initiatives in industrial maintenance for 20 years. Our SAP Certified EAM software improves the capture, structure, and quality of the data needed to identify risk factors and build an ESG risk management plan. Our solutions enable you to respond more quickly to implement mitigation efforts and coordinate response activities.
Our Mobile EAM application provides full access to safety and response procedures even in areas of low connectivity such as dams, electrical transmission stations, and oil refineries. This mobile app also helps your technicians accurately capture the structured data you’ll need to build your ESG risk management plan to protect your critical assets.
Our integrated Planning & Scheduling desktop software automates many scheduling routines with SAP EAM such as checking capacities, assigning resources, and prioritizing work orders. Full visibility of the workforce availability and skills can be especially critical when responding to an emergency.
Our Mobile Warehouse & Inventory solution digitalizes the workflow of stockroom personnel, from inbound to outbound transactions, with an intuitive user interface. Knowing exactly what supplies you have on hand in a time of crisis saves time and allows you to respond more quickly.
With our EAM products for SAP, your company can better collect the data needed to develop and implement an ESG risk management plan to protect your enterprise assets, your employees, the environment, and your community. Let us help you make sure you are ready to respond quickly and efficiently to any ESG risk incident which may occur.