Integrating ESG risks into your business strategy
Date Posted:Wed, 12th Apr 2023
The need for environmental, social, and governance (ESG) initiatives has never been greater. These are seen in the carbon-neutral targets of corporations, announcement of newly appointed ESG leads, launches of ESG-linked investment products and the evolution of diversity, equity and inclusion (DE&I) initiatives. Businesses today are expected to help advance healthier and more equitable societies through inclusive employee benefits, which at the same time can bring competitive advantages, such as attracting a diverse workforce. This is especially important after the COVID-19 pandemic widened social divides. For businesses, requirements have increased for ESG disclosures, such as compliance with the Task Force on Climate-related Financial Disclosures (TCFD). Companies increasingly need to display their ESG plans or risk losing access to insurance or financing.
Companies need to actively manage their environmental impacts across the value chain, such as forestry and agricultural land use, electricity use, water use, and resource circularity.
This requires quantifying a business’s environmental footprint, assessing environmental management policies, and studying the external operating environment for potential regulatory exposures and supply chain risks, among others.
There are also ongoing efforts to elevate biodiversity concerns, including the recent announcement of a Taskforce for Nature-related Financial Disclosures (TNFD), based on the successes of the TCFD. With more than half of the world’s economic output moderately or highly dependent on nature, taking action to manage nature-related risks is vital and will allow businesses to become more attractive suppliers or business partners.
A clear ESG strategy helps companies understand climate-related risks and creates opportunities to access sustainable financing and other commercial opportunities. Consider the following steps as per TCFD:
Step 1: Formulate a climate risk strategy to identify and quantify impacts with financial and non-financial KPI's.
Step 2: Use climate scenario analysis, natural catastrophe modeling and advanced insurance analysis modeling to inform strategic decisions to improve resilience of critical assets.
Step 3: Determine appropriate reporting standards, identifying and collecting relevant ESG data, and developing board-level ESG risk and performance dashboards.
Step 4: Act on risk assessment data to enhance climate resilience through measures including engineering solutions and supply chain diversification.
Disparities and inequities for disadvantaged groups— including lack of access to healthcare, education, employment opportunities and digital technology—have widened the protection gap and posed reputation risks for businesses.
Effectively managing health risks—in part by taking steps to enhance employees’ emotional, physical, financial, and social health—benefits businesses in two ways:
The pandemic’s duration exacerbated mental health conditions for many, and helped put people-related risks—as well as their relation to business continuity, employee performance, client experience, reputation and the bottom line—on the boardroom agenda.
Many traditional benefit plans assume a linear life pattern, where an “average” employee gets married, buys a home, raises a family, and retires.
Health and well-being benefits often fail to take account of race, ethnicity, sexual orientation, gender identity, income, or country of origin, among other dimensions. Subsequently, health, risk protection, and well-being benefits offered to employees— including provisions for mental health, paid time off, and caregiving—are far behind the reality of a diverse workforce.
Firms should review their plans and introduce benefits that are designed to support all employees, regardless of race, color, gender, sexual orientation, national origin, and age.
Governance relates to an organization’s decision-making framework and process, such as the distribution of rights and responsibilities among the board, managers, shareholders, and stakeholders.
Business resilience is critical in ensuring an organization’s ability to withstand unexpected aftershocks of an event, such as the lockdown and movement restrictions that came with the pandemic.
The pandemic’s impact to supply chains, especially in the food and beverage and retail/wholesale industries, is a reminder to have contingency plans ready and to use Business Continuity Planning (BCP) to minimize and mitigate further losses. Regular reviews and exercises of business continuity management plans is necessary to ensure they remain effective.
Organizations must identify and prepare for systemic and emerging risks to build resilience and foster competitive advantage.
Business resilience is reflected in the ability to:
Understanding and Measuring Your ESG Risks
An overarching framework is necessary to have oversight and management of every aspect of a business’s ESG risks.
An ESG performance assessment helps develop an understanding of an organization’s current ESG maturity, which enables the following:
ESG Risk Management
The ESG risk management process entails identifying and quantifying the business’s risk aggregation and interdependencies across the value chain to help ascertain the degree of contingent business interruption risk.
By identifying and codifying ESG risks in a robust risk register, businesses can ensure an alignment of risk and sustainability management, and have a comprehensive view of existing and forward-looking ESG risks and their financial impacts.
In closing, ESG programs can create short- and long-term value. It is widely agreed upon that ESG programs create shareholder value and improve financial performance by maintaining a good corporate reputation, attracting and retaining talent, strengthening the organization’s competitive position, and meeting society’s expectations for good corporate behavior.
Given the deep expertise required for a successful ESG program, it is imperative for organizations to have a trusted advisory partner to support them in the alignments, assessments and risk management solutions as they quantify and measure ESG progress.
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