Consequences of ESG Violations
Violations of sustainability, business ethics, and corporate social responsibility (CSR) requirements in your supply chain can lower your shareholder value. “Every reduction in the Forbes Image Index by just a single point for companies listed on the stock exchange causes a 2.82 % reduction in company goodwill,” states a CIRANO report. “CSR issues often result in reduction of multiple index points.” In addition to the financial impact, ESG noncompliance by your suppliers can damage your own company’s brand and reputation.
A case study on supplier ESG violations illustrates these consequences. The riskmethods Solution™ can help companies manage their financial and reputational risk:
What happened? Between 2013-2015 one of the largest hardwood retailers in the US faced court cases for non-compliance and violation of the “Lacey Act.” This law bans trafficking in illegal wildlife, including plant products such as timber and paper.
Among other violations, the retailer was investigated for importing Chinese-made laminate flooring that contained potentially unhealthy levels of carcinogenic formaldehyde. Widespread consumer panic and negative media coverage resulted in a sharp drop in sales, and all senior managers were replaced. In addition to a $13 million penalty for environmental crimes in 2016, damage claims included a $36 million class-action lawsuit in 2018. The company was also fined $33 million in 2019 for lying to investors and the public about its compliance with formaldehyde regulations.
How did The riskmethods Solution™ help? Active monitoring and continuous alerts by riskmethods Risk Intelligence informed customers about the legal and financial situation of the company, as well as negative media coverage.
What did customers do with the information? Our customers were able to plan ahead and start securing alternative suppliers. Customers could make the strategic decision of halting purchases from the hardwood retailer to protect their own brand and image.
We saved companies. Being aware earlier on about violations by the retailer helped preserve and protect our customers’ integrity and image. They also avoid reputational harm, fines, and economic loss in their own businesses.