Business must learn to manage ESG risks, or suffer

Demo­graph­ic shifts, migra­tion, glob­al­i­sa­tion and new dig­i­tal tech­nolo­gies are defin­ing our time.

Because of this, busi­ness process­es, rela­tion­ships and mod­els are evolv­ing. For instance, up to 80 per cent of a company’s val­ue is intan­gi­ble, rest­ing in research and inno­va­tion, mar­ket­ing and know-how, cus­tomer rela­tions, entre­pre­neur­ial and man­age­r­i­al skills. This is a marked shift from even ten years ago.

Unfor­tu­nate­ly, busi­ness deci­sion-mak­ing and dis­clo­sure prac­tices have not caught up and often over­look cru­cial risks, oppor­tu­ni­ties and val­ue dri­vers across nat­ur­al, social, human, rela­tion­ship and intel­lec­tu­al cap­i­tal. This has to change.

ESG risks on the rise, successful companies must be prepared

Ten years ago, the top glob­al risks in terms of impact includ­ed only one envi­ron­men­tal, social and gov­er­nance (ESG) risk. But today ESG risks account for four of the top five risks in terms of impact, accord­ing to the 2018 World Eco­nom­ic Forum’s Glob­al Risks Report. We can no longer deny that ESG risks are enter­ing the every­day busi­ness real­i­ty.

Risk man­age­ment and deci­sion-mak­ing that incor­po­rate a wider array of sce­nar­ios and met­rics, includ­ing ESG, will not only help address some of the major chal­lenges of our time, they will also help more sus­tain­able busi­ness­es be more suc­cess­ful.

Com­pa­nies who man­age risks and turn them into oppor­tu­ni­ties can be more con­fi­dent dis­clos­ing infor­ma­tion to investors, demon­strat­ing their pre­pared­ness and resilience, attract­ing invest­ment. Those com­pa­nies that con­sid­er sus­tain­abil­i­ty and ESG risks sig­nif­i­cant­ly out­per­form those that don’t, espe­cial­ly if they com­pete on brand and rep­u­ta­tion, and/or use nat­ur­al resources.

As more investors begin to see and under­stand the rela­tion­ship between ESG risk man­age­ment and resilience, com­pa­nies will be reward­ed for their efforts. But how can com­pa­nies man­age ESG risks and oppor­tu­ni­ties?

Incorporating ESG factors into risk management strategies 

Until now there hasn’t been a glob­al­ly accept­ed frame­work for apply­ing main­stream enter­prise risk man­age­ment to ESG issues. Ground­break­ing work from the World Busi­ness Coun­cil for Sus­tain­able Devel­op­ment and Com­mit­tee of Spon­sor­ing Orga­ni­za­tions of the Tread­way Com­mis­sion (COSO) aims to address this.

Togeth­er, they have devel­oped appli­ca­tion guid­ance, align­ing ESG risk man­age­ment with COSO’s enter­prise risk man­age­ment (ERM) frame­work, one of the most wide­ly used risk man­age­ment frame­works in the world.

COSO’s ERM frame­work sets the foun­da­tion for organ­i­sa­tions to man­age risk in an evolv­ing busi­ness envi­ron­ment, while the new ESG appli­ca­tion guid­ance pro­vides prac­ti­cal approach­es for ESG-relat­ed risks specif­i­cal­ly.

Risk man­age­ment helps enhance per­for­mance by more close­ly link­ing strat­e­gy and busi­ness objec­tives to risk. Apply­ing COSO’s enter­prise risk man­age­ment frame­work to ESG-relat­ed risks aims to show risk pro­fes­sion­als and the sus­tain­abil­i­ty com­mu­ni­ty that ESG fac­tors can be man­aged effec­tive­ly with the exist­ing frame­work.

This is a big step towards bring­ing sus­tain­abil­i­ty into the core of main­stream busi­ness and as such it’s like­ly that inte­grat­ing ESG fac­tors into a company’s risk assess­ment will soon be the norm.

Busi­ness­es inter­est­ed in under­stand­ing, man­ag­ing and even­tu­al­ly dis­clos­ing ESG risks and oppor­tu­ni­ties should adopt this frame­work col­lec­tive­ly to improve ESG risk man­age­ment across sec­tors and geo­gra­phies.

Doing so will help pro­tect the long-term finan­cial via­bil­i­ty and soci­etal pro­file of busi­ness, help­ing more sus­tain­able com­pa­nies become more suc­cess­ful.