12-06-2023 08:30

How ESG risks affect investments

Investors are facing growing risks in their portfolios due to the effects of global warming and biodiversity loss. These risks are systemic and could destabilise the global financial system. Investors will want to navigate in this new global landscape.
A group of wind turbines standing next to a road in a moorland landscape on the coast at dawn.

The investment case for sustainability or ESG is clear. By using an ESG lens (Environmental, Social and Governance), investors can manage portfolio risks that may otherwise be neglected. Out of the ten largest risks to the world economy over the coming ten years, six are nature-related and two are social risks, according to the World Economic Forum. Some examples highlight the need for a more holistic risk perspective in investment decisions:

Environmental risks

Nature and the environment set the boundaries for life on Earth and for all economic activities. Looking at only direct physical risks from climate change, such as droughts, wildfires and extreme weather events, central banks suggest that global GDP could roughly be hurt by at least 20% at the end of the century with current climate policies, compared to by only 3% if the world can reach net-zero emissions by 2050. These figures illustrate that the faster the world phases out fossil fuels, the less costly it will be.

Biodiversity loss represents another key environmental risk. During 22 years only (1992-2014), globally produced capital per head doubled according to the Dasgupta Review. During the same period, the value of the stock of natural capital per head declined by nearly 40%, counted as the market value of minerals and fossil fuels, agricultural land, forests as sources of timber, and fisheries. Demands are simply much higher than nature’s supply. To tackle the fastest extinction of species in ten million years, global leaders decided at the UN Biodiversity Conference in 2022 that 30% of the Earth’s surface needs to be protected by 2030. The EU also has a target of no net loss of biodiversity by 2030. This will impact how companies operate. Between a third and half of the assets held by financial institutions are highly or very highly dependent on ecosystem services, according to studies by central banks.

Social risks

Social and human rights risks are embedded in the current climate and nature crisis. Farmers get hurt by droughts and floodings, and when land is converted from forests to a mine, it affects biodiversity, water resources and the nearby communities. For the energy transition to happen without too much resistance, it has to be just and equitable. To address that, the EU has a special fund to compensate for example for lost jobs. Companies that provide decent labour conditions typically demonstrate higher productivity and reduce reputational risks to the brand. Also, the PRI recognise that meeting international social standards leads to better management of financial risks and helps companies to align their business with the evolving demands from customers as well as regulators. 

Governance risks

Well-run companies often score well also in sustainability ratings. They are good at managing ESG risks in their value chain and have products that meet real needs in the world. Good governance in a company includes robust management systems and long-term compensation programmes for managers. Also, diversity at all levels is important for effective decision-making. McKinsey research indicates that diverse companies are 33% more likely to have greater financial returns than their less diverse industry peers.

Corruption and lobbying are other areas for investors to monitor. Businesses and individuals pay over one trillion dollars per year in bribes, and about 5% of global GDP is lost in corruption every year, according to the UN.

Global risks ranked by severity over the long term
(10 years)

1. Failure to mitigate climate change

2. Failure of climate-change adaptation

3. Natural disasters and extreme weather events

4. Biodiversity loss and ecosystem collapse

5. Large-scale involuntary migration

6. Natural resource crises

7. Erosion of social cohesion and societal polarization

8. Widespread cybercrime and cyber insecurity 

9. Geoeconomic confrontation 

10. Large-scale environmental damage incidents

Source : World Economic Forum Global Risk Perception Survey 2022-2023

Interested in reading more?

This article is based on our latest publication on ESG investing:
"How sustainability risks affect investments".

Download the full publication

Using an ESG lens to manage risks and identify opportunities

ESG factors help investors understand how companies create long-term value with their business model and allocate capital to a more resilient and future-proof economy. By using an ESG lens, investors can identify both the risk exposure in their portfolio companies and the investment opportunities coming with the accelerating climate and nature crisis. Information about companies’ exposure to and management of ESG risks can be found from various data sources, including the companies own reporting.

Investors can look into whether companies have a credible strategy to reduce emissions in line with the Paris Agreement if they adhere to the UN Guiding Principles on Business and Human Rights, and how diverse the board and senior management group are, to name a few examples. Investors can also identify companies that provide solutions to global challenges such as the energy transition.

Based on the increased knowledge of ESG risks and opportunities, several investment strategies can be considered and combined:

  • Exclude companies with high exposure to ESG risks.
  • Buy stocks from companies that are more resilient to ESG risks, for example have low exposure to risks and/or are good at managing those risks.
  • Invest in companies linked to a sustainability theme, such as clean water or energy transition.
  • Practise active ownership – for example, vote at companies’ annual general meetings or try to influence companies in a more sustainable direction.

Investors who wish to be less active could instead turn to funds with credible ESG approaches.

At Nordea, we integrate ESG risks, alongside other financial risks, in our investment decisions and investment advice. All investment funds we recommend need to meet basic ESG standards. In addition, we enable our customers to invest in solutions to the pressing challenges facing our societies today. We have compiled the funds we believe follow an ambitious sustainability strategy under our Sustainable Choice concept which includes the different investment strategies listed above.

Typical ESG risks


Environmental factors

  • Climate change
  • Biodiversity, natural capital and ecosystem services
  • Fresh water
  • Pollution, waste management and hazardous materials


Social factors

  • Human rights
  • Labour rights and working conditions
  • Community relations



Governance factors

  • Corruption
  • Board composition
  • Compensation to senior management




Gunnela Hahn
Senior Sustainable Investment Specialist, Nordea Investment Center
Emmy Lööw
Sustainable Investment Analyst, Nordea Investment Center
Markets and investment