Environmental, Sustainability, and Governance (ESG) investing is a term that is often synonymous with socially responsible, sustainable or impact investing. ESG investors consider environmental, social, and governance factors alongside financial factors when deciding whether or not to purchase a particular investment. From 1995 to 2016, responsibly managed investments have grown from $639 billion to over $8.72 trillion, an increase of 1,265%. Today, nearly one out of every five dollars under professional management in the United States is involved in some form of sustainable and responsible investing.
The See-Through Economy: Smuckers now face losses and liabilities not only from the FDA for violation of quality and safety, lost sales from customers switching brands but also investors who are abandoning the stock due to failures in risk management, the foundation of good governance. Establishing an effective ERM program that would have prevented this scandal at Smuckers would cost $500,000 or less than .01% of revenues where their direct losses from this scandal exceed US$ 400 million, representing 3% of annual revenue. In addition to the moral hazard of poisoning customers, how can Smuckers continue to be financially negligent in their risk management responsibilities?
According to Censible, “J. M. Smucker performs very poorly among its competitors on corporate governance. This score is determined by the company’s accounting practices, executive pay, board organization, and ownership structure.” LogicManager has proven in a joint study with Queens University in the United Kingdom that organizations with adequate enterprise risk management programs have a 25% higher market value.
Failures in risk management are typically systemic. While a company can outsource activities to a vendor, no company can outsource their accountability for risk management. Scandals like this are entirely preventable but not only happen but reoccur because these incidents are treated as “isolated occurrences” as Smuckers appears to be doing, rather than recognizing the true root cause which is a poor risk management program is not addressed. This vendor risk (and others) would have been uncovered by using software for vendor management.