Depending on who you ask, ESG is either a broken system in need of rethinking or the most urgent mandate of our time. In political circles, the backlash is loud. Across the US, a wave of anti-ESG sentiment has painted responsible investing as ideological overreach. But in boardrooms and investment committees, the view is far more pragmatic. The global value of ESG assets is still expected to reach somewhere between $35 and $50 trillion by 2030. [1] In 2024, 60% of global investors reported higher performance yields from ESG investments and 78% said they would be willing to pay higher fees for ESG-focused funds because they believe in the financial upside. [2]
If public and private markets are any indication, ESG is not going anywhere. That is because it makes business sense. At its core, and away from the label, ESG is a practical framework for identifying and managing the risks and opportunities that shape long-term performance. These risks are not abstract. They show up as reputational fallout, operational breakdowns, legal liabilities and financial loss. Managing ESG risk offers companies a way to get ahead of those vulnerabilities before they become costly.
And today, risks are growing. Climate change is making extreme weather events more frequent, impacting supply chains and operating margins. Globalization has created intricate, interdependent supply webs where a disruption in one country cascades across dozens. Legal frameworks are tightening across the globe, from Europe to North America and Asia. ESG is no longer about reporting on sustainability but preparing for a new normal defined by complexity, disruption and heightened scrutiny.
The question is not whether it should be part of the process, but where to begin. Some risks are macro; some are micro. Some are structural, others are managerial. If companies need an actionable, reliable and quick starting point, they need to start with what is baked in: inherent risk.
Geography, Industry and Culture as ESG Exposure
Inherent risk is a business’ baseline exposure based solely on where it operates and what it does. It is the ground floor of any risk framework and a useful lens to start looking through.
It all starts with two facts. First, your operating geography creates a baseline for environmental, social and governance exposure. Weak labor protections, corruption or human rights violations in a country expose companies to reputational, operational and legal fallout before any international management comes into play.
Take Bangladesh, for example. The country is one of the world’s largest garment exporters, but lax enforcement of building codes and labor laws created the conditions for one of the most tragic industrial disasters in recent history: the Rana Plaza factory collapse, which killed 1,134 workers and injured thousands more. Major brands like Primark and Walmart faced global scrutiny for their ties to unsafe factories. Protests, boycotts and mounting pressure forced companies to re-audit supply chains, move production and pay over $30 million in compensation, all while suffering significant reputational damage.
Second, industry-specific dynamics define exposure too. A company’s line of business can carry built-in ESG sensitivities. Tech firms are increasingly under pressure for their reliance on rare earth and transition metals like cobalt, lithium and tantalum. These materials are linked to environmental degradation and unethical labor practices in extraction regions. Supply chain traceability, geopolitical dependencies and reputational exposure all come into play. Or consider chocolate manufacturers. Ongoing scrutiny over cocoa sourcing, particularly in West Africa, has raised red flags around deforestation, child labor and farmer exploitation. These issues create operational and legal risks that require proactive management, even before a single factory or partner is selected.
Importantly, inherent risk is not only about structural and institutional fragility. Culture plays a role as well. In many cases, local norms around worker treatment, governance and equity may differ significantly from international expectations. There is no blame in this. But when these norms diverge from what regulators, investors or global buyers deem acceptable, they introduce risk. This is especially true in the social dimension of ESG, where local customs and global standards often collide.
In other words, some risks are inherited. Before making a single decision, exposure is already shaped by where a business is and what it does.
More Than Meets the Eye
From countries and sectors to value chains, the external landscape that affects risk exposure is vast. There are over 190 countries and according to the NACE classification, there are 26 sectors, hundreds of industries and more than a thousand sub-industries. Most companies operate across several of them.
The average auto manufacturer has 250 tier-one suppliers, but as many as 18,000 across the full supply chain. Aerospace companies average 200 tier-one suppliers, but 12,000 across all tiers. Tech firms have around 7,000 suppliers, with constant changes due to innovation and market shifts. [4]
It is not just supply chains. Consider portfolio exposure. The US banking sector alone manages $24 trillion in assets. [5] That is thousands of assets to evaluate across E, S and G, each with its own risk profile.
Mapping ESG exposure at a granular level is important, but not the best, nor the most efficient place to start. Starting with inherent risk lets you immediately zero in on your high-risk zones. Instead of scanning everywhere and everything, inherent risk provides a bird’s eye view of macro-exposure so companies can start where it matters most.
Walk the Talk, Fast
Understanding risk hotspots is the precursor to focus and action. If a cluster of suppliers operates in regions with high risk of forced labor, companies know they need to prioritize site visits, increase documentation requests or roll out rapid audits.
Or, say a business operates in a sector with known environmental exposure, like water use in the food and beverage industry. If the inherent risk in the sourcing region is high, they can already start implementing water conservation protocols or consider alternative sourcing strategies.
Without this baseline macro-view, companies would have to go entity by entity or asset by asset. That means weeks to months of work, repeated multiple times a year. Add in consultants, analysts or tools, and the costs spiral. It is not useful, let alone scalable or timely.
Speed Meets Scale
Technology means that inherent risk can be mapped out at record speed and accuracy. AI is able to process large amounts of ESG risk data across the most complex of supply chains or portfolios, and benchmark them against global indicators and curated data. It can generate exposure synopses, flag emerging or prevalent risks; it can even suggest courses of action and pre-emptive measures in case of any shift in country or industry data. AI can keep pace with the scale and speed required to identify ESG risks quickly, accurately and proactively. [3]
Bottom Line: Zoom Out to Zoom In
Inherent risk provides perspective. Before zooming into entities, portfolios or suppliers, it anchors the assessment, allowing companies to pinpoint their greatest vulnerabilities before diving into the weeds. That shift in sequence matters.
When it comes to ESG risk management, too much time is spent trying to track everything. What if instead, businesses begin in a targeted manner, directly where it is needed? Wouldn’t that be a more efficient use of time and resources?
We live in a time of compounding risk. Focus is what will separate reactive efforts from effective ones.
Sources
[1] Bloomberg: https://www.bloomberg.com/company/press/global-esg-assets-predicted-to-hit-40-trillion-by-2030-despite-challenging-environment-forecasts-bloomberg-intelligence/
[2] ESG News: https://esgnews.com/78-of-investors-would-pay-higher-fees-for-esg-investments/
[3] IBM: https://www.ibm.com/topics/artificial-intelligence-sustainability
[4] McKinsey: https://www.mckinsey.com/business-functions/operations/our-insights/risk-resilience-and-rebalancing-in-global-value-chains
[5] S&P Global: https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/total-assets-of-us-banking-industry-top-24-trillion-in-q4-72899923
