Firming Up on ESG Management. Here’s Why Companies Should Not Delay it Any Longer?

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Introduction

Not many years ago, Environmental, Social and Governance (ESG) agenda has always been sidetracked by companies. The importance of ESG back then was not clearly understood and only observed as an addition to regulatory obligations. The lack of awareness by the Board and management of companies also didn’t help to overturn this mentality. However, companies across various sectors nowadays have started to give more attention to its ESG management and performance. More and more companies have shown unique approaches in ensuring ESG plays an integral part of companies’ corporate strategic agenda. With the impact of COVID-19 pandemic, companies are pressured to step up their ESG management and reporting. This article will briefly highlight the approach that companies need to consider in order to meet the increasing ESG expectations.

 

Multi-Stakeholder Management

Stakeholders are affected and also affecting all of the ESG criteria – Environmental impacts, Social impacts and Governance impacts. But as a ‘Stakeholder’, social issues have always been the central focus, ranging from community engagement to subjects related to human rights. Though till now it is difficult to quantify the financial values generated from social issues, but the impacts posed by the mismanagement of these issues are severe as companies would lose the confidence and trust from its stakeholders and eventually have reputational and financial implications to companies. 

Talking about reputation, there is never the best time compared to now for companies to adhere to its corporate principles and progressively revamping its risk management processes and advances reputation. Just by meeting the current demands of internal and external stakeholders is no longer acceptable particularly to key stakeholder groups that are looking at long-term values and gain from companies. So, the demands on future ambition and performance are also vital. For example, COVID-19 has heavily impacted (and still impacting) companies’ workforce across sectors pertaining areas of health and safety, income stability, and overall workforce morale and motivation. Stakeholders are observing how companies deal with these challenges and assuring the best solution are being provided to benefit them during and after the pandemic crisis.

Specific stakeholder groups such as regulators and investors as well as other market participants that include rating agencies, will continue to press companies to place paramount attention to social issues and how companies shows resilience in the competitive and challenging business landscape.

What can be learned from the recent COVID-19 crisis is that the immediate focus on social issues creates an opportunity like never before for companies to relook and improve on its overall stakeholder management and engagement to all of its key stakeholder groups such as its workforce, community, regulators, investors, and also those across its value chain such as the suppliers.

That being said, in allocating the efforts and resources towards managing the critical social issues, companies should not lose control of the continuous enhancement of environmental and governance issues. At the end of the day, ESG issues are interconnected. Apart from that, environmental issues such as climate change imposes great threats and impacts for companies. The impact of COVID-19 pandemic should provide companies the lessons that their business should be prepared at all times of all ESG risks that may affect them in the long-term. 

 

Effective ESG Strategy

ESG is no longer something that is ‘nice to have’, but are now considered as an imperative component of companies’ financial performance and evaluation. For instance, there was an estimated increase of USD$70 billion investment pumped in the 2019 ESG funds. This supports the prediction that ESG investing to top USD$50 trillion in the coming two decades. This trend points out that ESG investing will one day become mainstream and there is a clear opportunity for companies to reap the benefit if they prepare for it from now.

An effective ESG strategy is not only important to help companies to achieve the desired sustainability ambitions, but also provides a clear direction on how they can consistently improve their performance, manage and mitigate its risks and enhance market position.

The progress and outcomes of companies’ ESG strategy should also be communicated to all stakeholders to enable companies to gain the trust and confidence especially from the investors for long-term value creation.

In reaching towards the development of an effective ESG strategy, companies should oversee in a diligent manner on five key components; the companies’ material issues, roles and responsibility of the governance structure, comprehensive policies and innovative programmes, metrics and targets, and ESG communication.

To come up with strategic focus areas, companies should analyse issues that have the most interest, as well as impactful on and towards the business and the key internal and external stakeholder groups. Focusing on financial matters are now redundant as more and more ESG related issues are gaining the interest from stakeholder groups. It is definitely difficult to meet the demands from all stakeholders, as it is also not viable for companies to neglect the business needs. So, companies should have a structured and robust process in place to derive the key issues that have balance significance on the business and also the key stakeholder groups. These are considered as the material issues that should be in reference to companies’ ESG strategy development.

A sound governance structure should also demonstrate accountability and awareness on ESG management from all levels especially the Board and management. The Board and management should be aware of all ESG risks and opportunities relevant to the company and the industry the company is in. There is no template approach in ESG management as companies varies from one another. So, it is absolutely important that the governance structure to carefully formalise the roles and responsibilities that maximises the implementation and monitoring the robustness, effectiveness and the performance of companies’ ESG strategy. It is also important to note, that even though there might be specific functions or personnel that are responsible to oversee ESG management of a company, the ideal approach is for the collaboration of different functions to come together and work on ESG management as one whole unit and to ensure regular and beneficial exchanges of information are feasible. This would allow better risk and opportunities management particularly once companies have define the material matters to companies.

The development of ESG policies and programmes should be well-coordinated and strategically planned out. In order to do so, companies should not envision the short and medium-term outcomes but to also evaluate the long-term outcomes for the companies and stakeholders. In undertaking this evaluation, companies must see the areas that are feasible for them to optimise and capitalise in the specialties and strengths that are unique and aligned to the companies’ values. Most importantly, companies must anticipate the potential changes in the business landscape including the political, regional, regulatory, social and environmental trends that would likely to occur within the proximity of companies’ operations and influence. This would allow the companies to reap the long-term financial returns and remain competitive at all times. Having these understandings, companies should be in a good position to allocate the investments, resources, timeframe to implement the relevant plans for its ESG strategy.

The success of any strategy, including ESG strategy depends on various factors that are controllable and uncontrollable. Companies should always monitor the performance of the developed strategy to analyse the value it brings to be desirable or would actually cost additional effort and unnecessary investments to the companies in the long run. Companies must adapt and be flexible to changes and also must know when. The results from the materiality assessment (to identify the material matters of a company), should be referred to in developing the relevant metrics, KPIs and targets that are achievable and realistic to place companies in a higher ESG management position. Setting metrics, KPIs and targets that are too ambitious immediately may result in early failures that would lead to demotivation to oversee ESG management as a whole. The overall objective is essentially to measure companies’ ESG performance, so companies should be mindful to develop metrices, KPIs and targets based on its ability to improve and that are manageable to monitor over a sustainable period of time.

The progress of companies’ ESG performance provides important data and information for companies to readjust and restructure on improvement approaches. It provides important data and information for stakeholders as well. It is already well known that the access to transparent information on companies financial and ESG performance is key to gain stakeholders’ confidence, trust and loyalty. Communicating ESG performance may come in various ways via companies’ Annual Reports, Sustainability Reports, websites, AGMs and companies may even create specific events to solely discuss and share on their ESG performance and obtain instant feedback from the stakeholders. This would not only provide insights on the rationale and ambition of companies ESG strategy to stakeholders but also provides solid and concrete responses on how certain stakeholders value the ESG strategy that are affecting them. These exchanges of information will further assist companies to develop or redevelop better ESG strategies.

 

Conclusion

Companies’ ESG strategies or framework for continuous value creation should by now be driven by the Board and management that oversee ESG management and reporting as not merely a voluntary approach to one that in some jurisdictions is increasingly subject to mandatory reporting. Companies that have not embarked on ESG integration into their business operations, or companies that have started to, or even companies that have somewhat fully integrated ESG must all understand that the current landscape demands them to always be ready to improve and adapt. There is no room to be comfortable with the current establishment and practices in place would eventually be obsolete without them even realising it.

 

All views and opinions expressed on this site are by the author and do not represent any particular entity or organisation 

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COVID-19 Has Taught Us that Conventional Risk Management is Obsolete. Here’s Why.

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Introduction

The COVID-19 pandemic has indeed shocked the world and are putting many business in a fragile state in being able to sustain in the long term. COVID-19 as the current biggest threats to organisations regardless of their industry and locations, has pressured businesses to reevaluate their priorities and business strategies to strive in the already challenging world but companies has taken a step back to assess whether its current risk management process is robust enough for the business impact from COVID-19 or other external risks.

 

The Rise of Environmental, Social and Governance Risks

The World Economic Forum in one of its recent reports has shared that the biggest risks businesses will face in the next year (up to 18 months) is the prolonged recession of the global economy.  Organisations should be aware that external risks, including the Environmental, Social and Governance (ESG) risks are categorised beyond the fallout of the pandemic; economic risks, societal risks, technological risks and environmental risks and should raise concerns amongst businesses.

Organisations by now should have already looked at the approaches to feasibly integrate ESG risks into its business risk management. Just like the business threats imposed from COVID-19, these ESG risks are not expressed using financial metrics. But as from what has been vivid from the pandemic, they certainly pose great financial implications. Climate change has been under the focus of many businesses nowadays as not only it has gained tractions from regulators, but it has caused social unrest and physical disasters or transition and physical risks to organisations. This also has caused the risk landscape to be changing, and changing drastically. The rise in not only economic, but health, social and environmental crises we all are facing today could only mean that organisations must reevaluate the corporate strategy, reframe their business future ambition and revamp the risk management framework as a whole.

 

New Approach to Risk Management

It has taken the detrimental effect of COVID-19 to coerced organisations’ Board directors and managements to scrutinise external risks (including ESG risks) as the core subject, and relook at the areas lacking in management and monitoring of external risks.  

Just weeks before the pandemic, the result from a survey of 500 Board directors and Chief Executive Officers (CEOs) found that only around one-fifth of Board directors were “very satisfied” with their effectiveness in overseeing changes to the risk landscape and resulted in adjustment in organisations’ risk appetite accordingly. This is also the same ratio that represents that Board directors were “extremely confident” in risk reporting from management on a range of significant issues.

These findings signifies the point that conventional risk management processes should change and improve, and companies are paying attention. The World Economic Forum also provides insights from a published paper on integrated governance that noted the necessity for businesses to also improve in stakeholder engagement in order to manage risk strategically.

One of the six recommendations is to internalize material ESG & Data factors in enterprise risk management and Boards must gain more in-depth understanding of rapidly evolving environmental, social, governance and data stewardship risks.

Recently, COSO launched a report that focuses on the integral components of the Enterprise Risk Management (ERM) framework, the Risk Appetite Framework. The report by COSO highlights the approach on transform business ‘to anticipate and understand their risk when change happens and to better embrace change and be more agile in challenging conditions’.

This is mainly because in complete absence of a good governance of risk management of both from the internal and external stakeholders’ perspective, organisations will not have the necessary resources and capacity to set up a robust external risk management processes. This will also come hand in hand with the fallout from the lack of trust with organisations’ stakeholders. External or ESG risks management do not only require organisations to look at how they can protect shareholder interest but it’s about being prepared and responsive to the societal and environmental needs as a whole.

 

The Limitations of Conventional Risk Management

The survey by EY global risk also shows that close to 80% of Board directors indicates that organisations are unprepared for significant events such as the COVID-19 pandemic. This is probably due to the lack of governance practiced in conventional risk management as only 40% of Board directors and management explained that ERM are effective in managing atypical and emerging risks.

This is contributed due to data management and analysis. We have now seen that the majority of the current risk management processes have become obsolete and are not built to manage the abundance of critical data generated. Without efficient data management and analysis, the typical risk management process may not succeed in extracting meaningful insights and apply the necessary steps to gain the value and benefits from data analysis.

50% of financial leaders concur to the statement that they spend more time gathering and processing data than they do analysing it, yet alone the decision-making process based on through risk data analysis.

Apart from good corporate governance practices, the Board directors have imperative roles in ensuring risk management practices in organisations run efficiently. The power of data should not be overlooked. Obtaining and most importantly, utilising a continuous stream of valuable and latest data and information is paramount in order to gain buy-in at the Board level. Evaluations and understanding of emerging trends, and prioritising the needs and demands of stakeholders are key considerations to ensure organisations to improve in the overall risk management processes and improve the organisations’ performance. Thus, it is absolutely essential for Boards directors to have the support via data analysis to gain the awareness and insights of the impacts of poor external and ESG risk management on the business.

 

Technology is the Solution

The current business environment requires organisations to meet stakeholder demands and expectations. The question is; Do organisations have enough resources and capabilities to meet the demands and expectations? One of the pressing matters to get internal management’s buy-in is the investment in technology. Organisations cannot be both timely and accurate in producing information from data analysis without the very latest technology. Organisations need a defensible, technology-driven process to back that up and to monitor the risk landscape as it evolves.

The business world we are in today are exposed to complex external risk environment that make organisations vulnerable to broader, complicated and often indirect risks that are very challenging to manage and monitor. As mentioned earlier, effective risk management presses organisations to be focus on data-driven approaches that allow organisations to mitigate the external landscape and focus on the risks that are the most material. These insights will provide with strategic considerations to enable a more dynamic business decision making.

Organisations should start to reinforce risk governance and internal controls and these need to be aligned with the areas that are deemed critical to be improved and transformed. Together with adoption of sophisticated technology software and infrastructure, organisations will possess the systems in place to utilise extensive range of data into something useful and viable information to develop business strategies and profitable business making processes, where and when it matter most.

If we revise the impact of the pandemic, organisations should have already anticipated the drastic response from regulators, governments, peers and wider society. According to Datamaran that tracked regulatory and corporate responses to pandemic more broadly by applying Artificial Intelligence (AI) to analyse the COVID-19 specific responses in real-time, the access to information are more accurate and obtained faster that are imperative for data analysis to give the edge to strive during and post COVID-19 crisis.

AI does not only save laborious time for data consolidation, but it is extremely useful for consistent monitoring. This would be beneficial in order for organisations to identify, structure and prioritise specific risks that are the most impactful to them during a specific period of time. With this, organisations will always be flexible and responsive to any external risks impacting them.

 

Communication on Data-driven Approach in Risk Management Processes

Responding to risks is the defensive approach for companies to be resilient. Proactive approach can be taken with embracing data-driven strategies for other external risks that at the moment are unclear, undetermined and uncertain. Leveraging on data with the right systems and technologies should facilitate organisations to be ready when these external risks emerge and impacting the business and the stakeholders within the operational boundaries and value chain.

Organisations’ plans should not be based on subjective judgements. Acknowledging that risk management is core to organisations, investment in resources and capacity needs are crucial to ensure overall business operations are robust and responsive. Organsations should also focus on communicating the outcome of data-driven approach are being taken to its stakeholders. Organisations should provide more information in the content of the annual reports, that include the risk factors and the forward-looking statements (should) be based on and rely on the risk analysis realised through the risk management framework and corresponding processes. Organisations are also encouraged to express how the Board directors and management determine the risk level organisations are ready to accept that are based on data-driven approach (Risk Appetite Framework). Stakeholders that are made aware of when data feeds into organisations’ decision making, will be assured that the overall business’ risk management processes are more robust, thereby increasing confidence in the organisations. 

 

Conclusion

As we look past lockdown to the rest of 2020 and beyond, robust external and ESG risk management is going to be increasingly vital for building resilient businesses and improving the trust of their stakeholders. Organisations should place the right governance and strategies to ensure data-driven approach are integrated into the current risk management processes to ensure responsiveness to the challenging risks to the business.

 

All views and opinions expressed on this site are by the author and do not represent any particular entity or organisation 

 

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