Alastair Phillips, Senior Manager of our Melbourne firm, explains the growing ESG risks companies are exposed to and dispels some of the common misunderstandings about ESG.
The recent release of the report, OnRisk 2020: A Guide to Understanding, Aligning and Optimizing Risk by The Institute of Internal Auditors (IIA) highlights the increasing reputational and financial risk to companies of not being able to effectively demonstrate they are managing their Environmental, social and corporate governance (ESG) risks. At the recent World Economic Forum in Davos in late January, the focus on the immediacy of climate change highlighted the growing expectation of companies to focus not just on their short-term profitability, but also on the longer-term management of risks which are important to their shareholders and broader stakeholders.
What is ESG and why is it important to organisations?
A corporation’s ability to trade depends on the confidence of its shareholders and the public. If it can’t demonstrate it has effective strategies to manage its exposure to ESG risks, investors and customers may choose not to support it or its products. The demand for increased transparency and reporting is around issues, including:
- the treatment of workers (anti-slavery)
- sustainability of products (use of resources)
- cybersecurity (protection of systems and data)
- diversity (gender and inclusion)
- workplace culture (conduct); and
- research and development (innovation)
This is forcing corporations to begin to implement whole-business strategies to assess, mitigate, monitor and measure associated risks and incorporate them into the organisation’s risk management processes.
ESG is not CSR – a common source of confusion
As a relatively new part of business activity, ESG is often confused with corporate social responsibility (CSR). However, while CSR may address specific environmental and societal issues, it is often less strategic. Effective management of ESG risks requires companies to assess key operations and stakeholders to develop strategies for managing the ESG risks that will most heavily impact the business. To do this effectively, companies must be clear on who in the organisation is responsible for ESG at a strategic and organisational level, as is the case with the management of other organisational risks. Corporations should also consider how to report on the management of ESG risks, noting that the demand for ongoing reporting is becoming the norm.
The upside of managing ESG risk
While the ERM process can tend to focus on managing downside risks, there is a range of benefits that come from effectively managing ESG risk. Corporations that proactively incorporate ESG risk management into risk management processes can realise a range of benefits, including:
- supporting a strong reputation as good corporate citizens;
- increasing employee engagement and lower turnover;
- improving corporate resilience
- strengthening relationships between organisations and their shareholders; and
- improving access to capital, especially as banking and finance organisations express their commitment to investing in companies that have a strategy for addressing ESG risks.
There is growing pressure from the public and shareholders to be more transparent about the strategies implemented to mitigate the ESG risks relevant to businesses.
Consider how you can measure and demonstrate your progress towards managing these risks by asking yourself about the management of ESG risks in your organisation:
- How well do you know your operations, supply chains and stakeholders? Do you know what your stakeholders (shareholders, suppliers and customers) priorities are?
- If you have a program to manage ESG risks, what data are you using to report on them, and how often do you release this data publicly?
- Have you assessed your operations against these priorities?
To discuss your ESG risks and how we can help, please contact your Pitcher Partners specialist.