Risks driven by environmental, social and governance (ESG) issues pose new layers of complexity for organizations to factor into their risk management. With increasing scrutiny from regulatory bodies, stakeholders, shareholders and indeed the public, the onus is on boards to set an ESG strategy that demonstrates corporate integrity, whilst supporting the attainment of business objectives.
ESG may bring new dimensions to risk management, but are the principles — identifying risks and systematically managing them to mitigate negative impact and maximize opportunity — any different?
ESG — THE BASICS
An organization’s ESG posture encompasses measuring and reporting on a wide range of factors surrounding its conduct. By way of an overview, ‘Environmental’ takes in a business’ approach and efforts towards operating sustainably and reducing its carbon footprint — and this can include everything from climate change and greenhouse gases, to biodiversity, pollution, water and waste management.
‘Social’ is people-centric; encompassing employee and partner relations, talent management, salaries, diversity, social justice and human rights, plus corporate and social responsibility (CSG) — how an organization ‘gives back’ to the communities it operates within.
‘Governance’ covers the governance of the ‘E’ and ‘S’ categories; the measurement and reporting on the business’ culture and conduct, in alignment with it its values, to provide transparency and accountability across everything from financial management and security, to board structure.
Bear in mind also that according to the Harvard Law School Forum on Corporate Governance1, ESG issues are ‘inherently reputational’. The social media spotlight and today’s news cycles illuminate the actions or inactions of corporates; fall out-of-step with market trends and public opinion and corporate reputation can be ‘punishingly’ damaged.
UNDERSTANDING RISK IN THE CONTEXT OF ESG
“Enterprise risk management must embrace ESG risks as they are increasingly integrated in the risk eco-system,” says Sword GRC’s Jenny Ritson-Smith. “In today’s climate, it’s impossible to overlook the monumental weight carried by environment, societal and corporate governance concerns. The Economic Forum’s 2019 Global Risks Report claimed that ESG risks accounted for almost all of the world’s top risks from impact and likelihood perspectives. Today, it’s hard to imagine that that will have diminished.”
ESG RISK MANAGEMENT BRINGS DIVERSE BENEFITS
In a piece entitled, ‘ESG: Risks, opportunities and Benefits’ published on the Global Association of Risk Professionals (GARP) website2, authors Robert B. Hirth and Rodney Irwin suggest, “The market is also shifting to reward the companies who understand how to measure, manage and mitigate these risks, and is even more receptive to businesses that are finding new, unprecedented opportunities in an evolving competitive landscape.”
Furthermore, “… paying attention to new ESG-related risks and opportunities while creating longer-term value isn’t the stuff of trendy, millennial-focused brands. Rather, it’s a key building block of running a fully future-proofed company that’s focused on resilience and long-term profitability.”
Evidenced by a study conducted by MSCI Research3, organizations that prioritize ESG are able to demonstrate greater competitiveness and profitability, fewer risk events and less systematic risk:
“In our analysis we have looked at both stock-specific risks, which are linked to companies’ specific business model and risk management processes, as well as systematic risks, which are macroeconomic in nature and are linked to companies’ exposure to changes in the market environment, market prices or changes in regulation.
‘… Our research indicated that ESG has affected the valuation and performance of companies both through their systematic risk profile (lower costs of capital and higher valuations) and their idiosyncratic risk profile (higher profitability and lower exposures to tail risk). Thus, the transmission from ESG characteristics to financial value was a multi-channel process, as opposed to factor investing where the transmission mechanism is typically simpler and one dimensional.”
“It’s not just about the line and profitability,” Jenny. “The benefits of effective ESG risk management are far reaching: Companies with a better grasp on ESG risk management can comply with changes in regulations and legislation more swiftly, better deploy resources, retain employees, enhance employee motivation, attract investors… and so the list goes on.
“For me, Hirth and Irwin’s concluding words summarize why ESG risk management should be embraced within enterprise risk management; I think their pragmatism will resonate with risk professionals as ESG takes greater focus:”
“It isn’t about “doing the right thing” — it’s about properly managing risks and opportunities for a stronger, more resilient and more profitable business over the long term.”
Learn how Sword’s Active Risk Manager can support your organization’s entire risk profile.
Involved in risk management within mining? In a Sword GRC webinar last year, Sarah Gordon, CEO of Satarla — specialists in risk management training, consultancy and research — explored the opportunity ESG risk management presents for investors and the sector. Watch the Environmental, Social and Governance Risks in Mining webinar.
1 Introduction to ESG (harvard.edu)
2 ESG: Risks, Opportunities and Benefits (garp.org)
3 Has ESG Affected Stock Performance? — MSCI
