Why Effective ESG Needs an Integrated Approach to Risk

Aarthi Natarajan

Whether motivated by investor pressure or competitive market advantages, organizations are incorporating environmental, social and corporate governance (ESG) initiatives into their corporate strategies. As companies move from ESG vision to action, they need a clear way to monitor the status of all of their ESG initiatives – especially for organizations that operate across global jurisdictions. Using an integrated risk management (IRM) solution enables organizations to track and monitor ESG risks across the enterprise, helping you identify key trends and undiscovered risks.

In this four-part series, we’ll explore what ESG is and how to use IRM to enhance and bring more accountability to your governance practices.

What is ESG?

Today, businesses are more accountable than ever to their customers and investors for adhering to a set of corporate values and ESG initiatives, and they risk financial harm or reputational damage if they betray expectations. Increasingly, regulators are also enforcing ESG strategies, which can encompass one or many of the following:

Environmental protections

  • Climate change
  • Carbon emission reduction
  • Water pollution and water scarcity
  • Air pollution
  • Deforestation

Social concerns

  • Corporate social responsibility (CSR)
  • Labor management/policies
  • Human rights
  • Data hygiene and security
  • Gender and diversity inclusion
  • Community relations

Governance

  • Board of directors and its makeup
  • Executive compensation guidelines
  • Political contributions and lobbying
  • Venture partner compensation
  • Hiring and onboarding best practices

As consumers become increasingly concerned about global issues such as sustainability and climate change, investors are taking notice, and the majority of companies are reporting on their initiatives around these issues even without a clear-cut ESG policy.

Today, many investors screen companies based on their ESG policies and require transparency in their processes to make an informed investing decision. Much like the financial disclosure regulations put in place by the Sarbanes-Oxley Act (SOX), an ESG policy provides a transparent look at your company’s ethical stance on a number of critical criteria that investors and customers care about. By establishing and monitoring ESG standards, your company can increase confidence and trust for all stakeholders — investors (both institutional and private), customers, and the broader community. Creating strong sets of KPIs and KRIs, benchmarks for your ESG criteria and a robust system of compliance controls will help your stakeholders trust your data, believe that your organization is highly attuned to evolving risks and your ability to adapt quickly to meet your ESG goals.

What Does ESG Mean for Organizations?

Your organization likely faces pressures from both investors and regulators to build an effective and transparent corporate governance culture. Companies have an obligation to ensure a top-down culture of effective corporate governance, effective internal controls across the full scope of business processes and perhaps, most importantly, a top-class risk management framework.

By going beyond what’s mandated by regulatory frameworks within the ESG sphere, your organization can better align with investors and minimize potential risk by preemptively seeking to meet the challenges of regulations that may arise in the future. Additionally, a robust and active governance culture will help identify misalignments within your organization early and set the course to minimize costs and resources to meet your business goals and avoid financial or reputational damage from evolving ESG risks.

In order to balance competing priorities, obligations and reporting needs associated with ESG, it’s important to have an IRM solution in place.

How IRM Supports a Stronger ESG Posture

IRM is a process — supported by technology — that allows top-down strategic objectives to be integrated with mid-level business processes and bottom-up risk identification. By embracing IRM within your ESG practice, you’ll be able to focus on identifying KRIs for each of your ESG standards and align them with your business’ overall strategic objectives. You’ll be able to identify key stakeholders for each risk and objective and develop trigger actions to help you automate risk management. Your risk management team will also have the ability to visualize and analyze risk data trends in depth so that you can use your ESG risk trends to inform long-term business planning.

Every individual and entity, from the board to the ‘shop floor,’ needs to understand their objectives in a way that aligns to their roles to identify and mitigate risks before they become material and impact the obligations the company has to its stakeholders. For example, a business unit responsible for increasing the production of a new product might also be responsible for meeting ESG goals around ensuring sustainable, sweatshop-free sourcing; reducing greenhouse gas emissions during production; and ensuring that the factory production line is meeting goals in recycling and repurposing waste. Each of these ESG goals and their associated KRIs and KPIs will be outlined within your IRM solution so that the business unit can continually monitor factory performance and be accountable for taking action to mitigate risk and improve performance along these metrics.

To optimize your IRM process, set up a framework that includes defined roles, an inventory of risks, their associated KRIs and risk mitigation plans for every guideline in your ESG policy. By using an IRM solution to monitor and assess risk scenarios in real-time, you’ll empower your entire risk management team to act quickly and to generate in-depth, strategic insights that will build trust with your stakeholders.

>>Continue to blog 2