ESG Risk Management: How to Conduct Risk Assessments, Analyze and Prioritize
The Background on ESG
When people collectively take responsibility for the future of our planet and humankind, they have the power to effect significant change. This has been the driving force behind ESG regulations and movements.
From as early as the beginning of the 20th century, environmental issues have demanded attention on the national stage. When a company involves itself in its sustainability practices and social responsibilities, it becomes part of a greater purpose, connecting to millions around the world. Customers and partners hugely appreciate this social consciousness and it bodes well for a company’s future.
Environment, Social and Governance (ESG) remained unregulated in the United States until recently. The shifting regulatory landscape has driven new ESG initiatives and proposals which aim to create greater accountability and consistency across reporting frameworks and compliance requirements. The EU has been quicker to adopt many prudent directives which are shaping how they do business.
What is ESG?
ESG gives those with interest in your company visibility into non-financial matters that are relevant to value and performance. The value of the three together is greater than the sum of its parts. The 3 pillars of ESG are:
E is for Environmental. Environmental, shockingly, covers aspects of the environment. This can include carbon footprinting, energy sources, recycling, hazardous emissions or waste disposal, just to name a few topics.
S is for Social. Social issues covered by ESG include diversity, gender equality, mental health, forced labor, healthy working conditions, and parental leave, amongst others. Protecting the people that inhabit the environment is the natural next step.
G is for Governance. How a company governs their business has a great impact on its overall ethics and investability. Diversity in the boardroom, corruption and bribery, tax strategy, protecting shareholder interests and disclosing information on these topics all feature under Governance in ESG.
Not practicing ESG can threaten the stability of a company and if not practiced properly, can be seen as a sign of unethical or corrupt behavior.
ESG is a specialized aspect of risk management, with a broad range of potential applications. ESG assurance is less intimidating than you may think if you take a sound strategy and use the right tools, like every other area of risk management. ESG risk management is essential for identifying, managing, and reducing all associated risks. Be on the lookout for ESG software that can automate some of the steps necessary to evaluate your business or your clients’ degree of ESG practice.
There is no one unified approach to ESG risk assessment. Global regulators are yet to create one standard to cover all jurisdictions or unify all elements of ESG. Data collection and analysis should help a company define ESG and which specific risks they may be exposed to. Completing a comprehensive risk assessment, as you would for any type of risk, is critical in order to examine the business processes and see how they align with ESG goals.
Your business strategy should incorporate your ESG risks and ensure you are prepared to mitigate or accept. Consider the controls and governance practices that will be required for these risks. Integrate key issues into awareness training, company policies and mission statements to boost company culture, drive attitudes and actions that align to these values.
Tip: Using readily available ESG software on a Cyber Risk Management Platform will allow you to embed ESG into your regular risk assessment and map controls across frameworks.
ESG and Investment Firms
We’ve established that ESG is critical for a company’s reputation and market success. Running a business with a social conscience has become key for investment firms. The transition towards sustainability and equity has become an integral consideration for investors who need to identify the long term risks and impacts, and maximize sustainability, with regards to a company’s ESG practices.
Sustainable investment creates value for both society and investors, and is currently a popular consideration for investors. The demand for socially responsible investment is on the rise.
As of 2020, 88% of publicly traded companies, 79% of venture and private equity-backed companies, and 67% of privately-owned companies had ESG initiatives in place. [NAVEX Global].
More than one in four S&P 500 companies that conducted earnings calls for Q4 2020 cited “ESG”. This represents a 63% increase in ESG mentions from the previous quarter, and the highest number of ESG mentions in the last ten years.
ESG indexes are made to aid investors in the evaluation of potential investments and the incorporation of ESG considerations into the decision-making process. ESG concerns may have significant financial repercussions, yet conventional financial analyses may not always take these into account.
A company’s exposure to long-term ESG risks and how well they are managed can be determined by an ESG grade. MCSI, for example, who have been rating ESG since 1990, use a rules-based methodology to rate companies (and countries, mutual funds and ETFs!) against the key ESG issues, from Leader (AAA) to Laggard (CCC).
The typical PE portfolio firm evaluates a number of possible investments, and in order to get the most accurate data in the shortest amount of time, it must use the appropriate ESG risk assessment tool.
By utilizing an ESG risk management framework, investors can rest assured that their risk analysis encompasses all important aspects and provides a clear picture of a company’s ESG compliance.
A great ESG risk analysis tool should save you time and resources. It should take ESG considerations and turn them into quantifiable metrics, and generate reports that provide valuable insights to support and drive smart decision making.
