Managing and disclosing ESG (Environmental Social and Governance) risks is a compliance mandate in every significant jurisdiction. Identifying, navigating and being transparent about key ESG risks is critical for any company’s survival and long term sustainability. Businesses across all Industry Verticals need to understand potential ESG risks and use informed decision-making to respond to them enabling identification of growth and advancement opportunities while building resilience and being future ready. Most companies are proficient at predicting, identifying and mitigating Operational Risks and Financial Risks, but when it comes to emerging risks related to ESG issues, they are less equipped to identify them and respond.
Board’s role in ESG Risk Governance
40% out of the total Risk officers surveyed indicated they were highly confident in the ability of management to effectively manage Known risks, while only a meager 8% were highly confident in the ability of management to effectively manage Atypical Risks.
Almost eighty percent of directors indicated that their boards need to improve understanding of emerging ESG risks and opportunities, in the current rapidly changing business landscape. As the stakes continue to rise, the private sector needs to increase its oversight of ESG Risks. To address this challenge, Boards globally are increasingly prioritizing matters such as diversity, environment, talent recruitment, and retention but aren’t always sure where and how to start.
Effective ESG Oversight Best Practices
When it comes to efficient real-time management of ESG Risks, it all begins with establishing Governance frameworks and moves through ERM activities of identifying, assessing, responding and reporting Risks, while maintaining a line of sight to the business context and strategy. Effective management of ESG-related risks initiates at the top with the help and guidance of an engaged Board. Oversight for the full spectrum of risks implies that Boards need to be aware of ESG-related issues. Once the awareness is there, it has to follow up with strategic processes of periodic and frequent Reporting as well as staying up-to-date with the latest ESG Trends.
(1) Real-time updates and Reporting on ESG to the Board and C-Suite: As a best practice, there should be a dedicated Board committee with an ESG focus that supports value creation by integrating ESG-related issues into day-to-day business decision-making. This committee needs to regularly generate and report ESG related updates focussing on ESG issues in the context of the business environment and strategy. These frequent updates need to contain information on vital risk metrics such as Risk Probability, Risk Impact, Risk Value and Geo-political representation of Risk location. These metrics are the key factors of real-time Risk Reporting as they give actionable insights on ESG Risks and their successful mitigation. Governance automation tools like ConfidentG Governance as a Service® platform support Real-time Risk Reporting with the help of Artificial Intelligence driven Analytics. Use of such Automation tools should be considered to support the Board’s agenda of effective ESG Risk oversight.
(2) Having a diverse Board that has relevant skills or knowledge regarding ESG: As diversity is becoming a popular agenda for many Boards, it is quite obvious here to understand that having a Board member with ESG expertise can be helpful if those skills relate to specific challenges the company or industry faces. This becomes all the more important when the company faces particularly challenging ESG-related issues or adopts values or a strategy that strongly aligns with an ESG-related issue or risk.
Charting the path ahead for successful ESG Processes
When Businesses, investors and other key stakeholders have a 360-degree view of their ESG risks, they get the power to make better decisions. Having transparent and adequate information, including information on environmental, social and governance (ESG)-related risks helps Organisations improve their risk management profiles.
ESG Risk management is not just about compliance; it is about doing business with Confidence for long term Sustainability.
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