In today’s business landscape, the ability to anticipate and address risks is crucial for ensuring the long-term success of any company. While it’s unrealistic to expect any organisation to foresee every risk, or even specific ones, once leaders are aware and have time to prepare for the uncertain future, some risks can indeed be mitigated.
The Risk Management Framework is about creating a culture of risk awareness throughout the organisation and this mentality will support better decisions.
However,
Traditional Risk Management approaches often fail to address emerging challenges such as environmental degradation, social issues, and governance concerns. To effectively navigate these complexities, organisations must recognise that a sustainability strategy and a business strategy should not be separated into different approaches, but part of a unique successful risk profile, making it real for their strategy, thinking in long term success. Certainly, the ESG risk considerations are part of an effective Risk Management.
Adverse environmental events, technological disruptions, geopolitical issues, policy changes, and global supply chain disruptions are just a few examples of the risks that businesses face in today’s uncertain future.
Adopting this Framework can empower your company to thrive and develop within its operating market!
Key Considerations on ESG-related risks
Environmental Risk
- Includes physical risks such as unpredictable weather events and environmental degradation affecting land, water, and air. This involves resources that are becoming increasingly scarce in nature, for example. Additionally, there are financial implications within the process towards the transition to a low-carbon economy that some industries feel more than others.
Social Risk
- Encompasses Economic, Health, and Safety (EHS) and their surroundings for employees and communities. Public scrutiny of these practices is expected to continue influencing areas like compensation claims, policies on protective gear at workplaces, and other health and safety concerns specific to industry needs. The Modern Slavery Act in Australia is an example of how public scrutiny of EHS practices can influence legislation and corporate behaviour.
Governance Risk
- Focuses on ethical and legal management practices, ensuring compliance with regulations and maintaining a stakeholder’s trust. For instance, the noncompliance with laws and regulations can expose the organisation to governance risk. For example, if the company engages in fraudulent activities or violates industry regulations, it can damage its reputation, lead to legal consequences, and undermine stakeholder trust.
Implementing ESG in ERM Framework
Enterprise Risk Management (ERM) provides a comprehensive approach to identifying, assessing, and mitigating risks across an organisation. By integrating ESG considerations into ERM, companies can mainstream these issues into their strategic planning and decision-making processes.
This framework is about culture, capability and practices that integrate strategy setting with performance. It embodies the core principles of creating, preserving and realising value.
Here, the main question in the management risk process is: How can we be successful and not only preserve value, but also create and realise it?
ESG risks within your company cannot simply be assigned to a separate department; they need to be integrated into the mindset of everybody within the organisation
The importance of Quantifying ESG risks
Integrating ESG into Risk Management means implementing tools for accountability. To do so, your business needs to be able to quantify these aspects within its sustainability report. Valuation professionals are using data to quantify risk and opportunity associated with ESG to help drive capital allocation and decision making.
The more effort is put into generating accountability, more reliable information you provide for your stakeholders, who expect high-quality quantifiable information for strategic decision making.
Integrating ESG into Risk Management will:
- Enhanced Resilience once your organisation can better anticipate and respond to a complex array of risks that threaten their strategic objectives.
- Identify opportunities by considering both positive and negative aspects of ESG risks, and lead to sustainable growth and competitive advantage.
- Improve your resources allocation, leading to improved operational efficiency.
- And help you to provide transparent disclosure to investors and stakeholders, meeting compliance requirements and building trust.
As a leader, your ambitions might be to consider ESG guidelines. These factors can significantly impact a company’s performance, reputation, and long-term viability. If you need help from a team of experts to integrate ESG risks into your Risk Management, get in touch!
