Is ESG a non-financial risk?

Yes, ESG (Environmental, Social, and Governance) is classified as a non-financial risk. This classification arises from the recognition that ESG factors can significantly impact a company's overall risk profile and operational performance, even though they do not directly relate to financial metrics.

Among the key risks are the following:

1. Integration into risk management: ESG risks are increasingly integrated into broader non-financial risk management frameworks. They can lead to operational disruptions, reputational damage, and regulatory penalties if not effectively managed, highlighting their significance in a company's risk landscape.

2. Regulatory focus: Regulatory bodies, such as the European Central Bank (ECB), emphasize the importance of incorporating ESG risks into governance and risk management strategies. This includes defining climate-related financial risks and ensuring they align with a company's risk appetite framework.

3. Operational and financial implications: Poorly managed ESG risks can result in inefficiencies and operational challenges, which may ultimately affect a company's ability to meet its financial obligations. Thus, while ESG risks are non-financial, they can have substantial financial repercussions.

4. Holistic risk assessment: ESG factors are part of a comprehensive risk assessment approach that includes operational, compliance, and reputational risks. This holistic view is essential for organizations to navigate the complexities of modern business environments effectively.