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.