Integrating ESG risks into a company’s risk management strategy | Insurance business America
Avoiding a “bolt-on” solution is easier said than done
Risk management news
By Kenneth Araullo
In today’s rapidly evolving corporate landscape, integrating environmental, social and governance (ESG) risks into a company’s risk management system is not only beneficial, but imperative.
As global regulatory standards and stakeholder expectations increase, companies are under increasing pressure to deeply integrate ESG considerations into their strategic and operational processes. Properly incorporating these risks into Enterprise Risk Management (ERM) not only aligns companies with global sustainability trends, but also strengthens their resilience to a range of new challenges, ensuring long-term profitability and success.
Natalie Runyon, Director of ESG Content & Advisory Services at Thomson Reuters Institute, highlighted the urgent need for companies to further integrate sustainability into their core businesses and ERM strategies. This approach is critical as companies face increasing pressure to align with global sustainability frameworks and standards.
“The convergence of sustainability frameworks and standards ensures global consistency in environmental, social and governance (ESG) disclosure. “In fact, the International Sustainability Standards Board has integrated the efforts of other industry-focused reporting initiatives, such as the Task Force for Climate-lated Financial Disclosures (TCFD) and the Value Reporting Foundation, among others,” Runyon said.
Runyon also noted that a key aspect of this alignment is the TCFD’s emphasis on identifying sustainability-related risks and opportunities and integrating them into governance, strategy, risk management and metrics.
“ESG legal counsel Honieh Udeka of Brown Rudnick warned companies 15 months ago to ensure an ESG strategy is ‘built in, not bolted on,’ adding that a ‘bolted on’ strategy ultimately fails “because the ESG values are just loose.” paired with business goals and processes [and often] “Added later,” Runyon said.
Explicit understanding, collaborative culture
In response to these needs, the World Business Council on Sustainable Development (WBCSD) and the Treadway Commission’s Committee of Sponsoring Organizations (COSO) have jointly developed guidance to help companies embed ESG risks into their ERM frameworks. Runyon said these guidelines propose establishing governance structures that dictate decision-making and execution, which is essential for effective risk management.
“Integrating ESG-related risks into ERM requires improving board and senior management understanding of these risks and fostering a collaborative culture among risk management staff. To put this into action, the company’s board and senior management must explicitly understand how ESG-related risks could affect the company’s performance,” said Runyon.
“In addition, management must be aware of its obligations with respect to current or future ESG disclosure requirements and have a full understanding of the company’s tolerance level for ESG-related risks.”
Runyon also notes that an effective ESG strategy requires clear ownership of each ESG-related risk. This includes appointing people who are responsible for managing specific risks and understanding how their business area impacts and depends on natural and social factors.
The entire process includes identifying, assessing and communicating ESG-related risks. Runyon said this includes integrating ERM with ESG risks by conducting materiality assessments and analyzing external megatrends.
“Given that organizations have limited resources to address all identified risks across the organization, prioritizing risks by assessing and assessing the severity of key risks is critical,” Runyon said.
Runyon cited forecasts and scenario analysis as clear examples and highlighted an important aspect that is urgently needed in the ESG-related risk framework.
“A critical requirement is to involve cross-functional representatives, including sustainability managers, risk officers and other ESG specialists, in the process of continually identifying the risks that most impact the business. “In fact, incorporating ESG risks into the company’s risk inventory and assessing the impact and likelihood of those risks are critical parts of the ERM process,” said Runyon.
The COSO and WBCSD framework also recommends selecting appropriate responses for each risk, which may include accepting, mitigating, transferring or avoiding the risk. Establishing metrics for ongoing evaluation of these responses is critical, Runyon said.
As an example, consider the issue of climate change impacting operations and supply chains. Companies can respond to this risk by adopting more sustainable practices such as reducing carbon emissions or using renewable energy. Financial risks related to climate change could be managed through dedicated environmental liability insurance products.
“As the risk environment becomes increasingly complex and uncertain, particularly in the long term, comprehensive consideration of ESG risks is an essential part of managing corporate and compliance risks in an escalated risk environment.” “Integrating a company’s sustainability strategy into the ERM governance is a method of integrating and incorporating sustainability into the organization’s overall operations,” Runyon said.
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2024-04-15 19:36:20
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