At its core, environmental, social, and governance (ESG) analysis identifies and gauges risks to corporate sustainability, as well as a company’s ability to address, minimize, and mitigate such risks.
For manufacturers and producers of goods, managing product safety risks is paramount, from the resources they use through the production, sale, and consumption of their products. If company management effectively facilitates safety at each step, it bolsters a culture of sustainability.
Likewise, safety failures can dim an organization’s future prospects, as public sentiment sours and distrust takes hold among consumers, suppliers, and investors.
Where Product Safety Is Material
Safety is more critical to some companies and industries than others, as the Sustainability Accounting Standards Board (SASB) Materiality Map suggests.
The Materiality Map identifies 26 sustainability-related factors most likely to impact a company’s financial condition, and it indicates that product quality and safety is material for companies in 26 of 77 industry groups across 11 broad sectors.
While industries in some sectors must consider all product matters critical, those in others are mixed. For example, in consumer goods, product safety is material for the building products and furnishings industry but not for e-commerce. Similarly, in the food and beverage sector, product safety is critical in the processed foods industry but not in the tobacco industry, where selling practices and product labeling are key.
Offering an investor perspective, State Street Global Advisors places product safety on par with climate change and labor practices when pressing boards of directors on ESG matters, according to a statement by the firm’s president and CEO, Cyrus Taraporevala.
Where exactly product safety fits in the ESG matrix is open to interpretation. Index developer MSCI files product safety issues under the umbrella of social considerations, while multinational companies such as McDonald’s and PepsiCo place them within governance.
Cautionary Tales Abound
Regardless of where product safety lands on a company’s ESG radar, awareness of its relevance continues to rise within the investment community.
Consider beleaguered aircraft manufacturer Boeing, which sidelined production of its leading-edge 737 Max plane following safety failures that led to two fatal accidents. Meanwhile, consumer products company Johnson & Johnson has been sued by thousands for safety concerns related to its talcum powder.
The repercussions of such missteps can be severe, as illustrated by the 2019 insolvency of German meat processor Wilke Waldecker Fleisch- und Wurstwaren, which failed to comply with a government order to sanitize its production plants amid a deadly listeria outbreak.
Conversely, toymaker Hasbro claims it adhered to a thorough product safety plan and had no consumer product recalls in 2019.
Given the potentially far-reaching consequences of a product safety crisis, such matters play a prominent role in many ESG risk assessments, as reflected in S&P Global ESG industry report cards on healthcare and consumer products and agribusiness.