What are the Current Key Social Factors that Drive ESG Investments?

 

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Introduction

Investments in the spectrum of Environmental, Social and Governance (ESG) have drawn assets in an increasing projection each year. Even during the beginning of the impact of COVID-19 pandemic, we had seen sustainable fund flows were resilient. In Quarter 1 2020, the sustainable fund had amounted to over USD 45 billion versus to outflow of over USD 380 billion for the global fund universe.

ESG funds saw loss in capitals during market selloff, just like many other non-ESG funds, however in comparison, ESG funds did not suffer loss as severe in the broader market where they had shown better performance on a relative basis.  

Similar with for index funds, we had seen over the majority of sustainable index funds ranging from developed and emerging market stocks had outperformed the comparable conventional index fund.

Similar outcomes were shown during Quarter 2 2020 where most sustainable funds outperformed conventional index funds covering the same market landscape.

 

Social Matters are on the Rise

One of the major issues due to the pandemic was it has caused and will continue to cause millions of people to be left unemployed. Apart from job security, the concerns on workplace matters have begun to be scrutinised further from the public and authorities. This includes issues on health and safety, work flexibilities and employee management.

The investors are also getting more serious on social issues. According to a survey on ESG, the interest on social issues had increased 20 percentage points since the start of COVID-19. To add, almost 80% of the survey respondents in the opinion that social considerations as contributing to positive impact on long-term investment performance as well as risk management.

Many corporate leaders nowadays are aware that more and more young investors have the preference to focus on ESG investing and the trend is also seen in female investors. Most financial institutions worldwide also observe this trend and have constantly notice the urgent need to equip the institutions with social sustainability emphasis as clients have started to ask questions on the matter.

 

Lack of Social Metrices

In comparison to the Environmental and Governance aspects, the Social aspect and the inadequacy of its metrices have not been given the same amount of attention. This resulted in the ineffectiveness for financial advisors to advise and guide clients to create portfolios to include a wide range of material social considerations.

Many reporting companies disclose a lot of its Environmental and Governance data, but Social data is still in the area where it requires more regulations in driving its more robust publications particularly for data that may affect the company’s reputation such as turnover rate.

Internally, there should be greater awareness of social issues that could potentially drive the initiatives to identify the relevant metrics to measure and report on, starting from the basic to a more complex sets of social data.

However, the unavailability of certain social data should not be the considered as the failure of a company to manage its social issues well. Some may already have sustainability-related mandates to support employees as well as having robust policies on labour rights, diversity and health and safety.

 

Conclusion

There is the current and ongoing trend of investors seeking long-term ESG investments, including from the Social aspect as these investors are driven by their own values while gaining long-term profit. However, more and more investors are demanding better avenue and data to attest the value creation from investments that consider Social material issues.

 

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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The Overview of How the COVID-19 Pandemic is Changing Supply Chain Management

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Introduction

Environmental, Social and Governance (ESG) risks poses threats to companies worldwide to drive globalization ambition to a more shared value and interconnected society and partnerships. This is not exclusive to certain companies or certain sectors, as what we are witnessing from the shocking effects from COVID-19 pandemic is that ESG risks are extensive across borders or even from the domestic landscape.

Impact on Trade and Investment

As vividly observed from lockdown measures across the world, local and global investment and trade are severely impacted and hurting most of companies supply chains and causes uncertainty of how the new norm and current measures taken are capable of ensuring supply chains are fluid as before the pandemic and could remain profitable – or even still operational.

Certainly this will contribute to the decline in global direct investment (FDI) in the following year, as well as decline in global mergers and acquisitions as these are linked to how resistant to which restrictive measures become binding and supply chains being relocated to home markets.

It is highly talked about these days that ESG risks are inter-related and so are the impacts. Thus, various professionals are advocating that the ways companies react to the COVID-19 pandemic impact shouldn’t be a ‘one-off’ approach as companies need to anticipate of other ESG risks such as climate change that will pose similar or greater impact.

The process of placing of restrictions and screening on investment and trade before the pandemic was justified based on the concerns of being solely dependent on a foreign company for supplies for goods and services and also the encouragement to local expertise and technology to be kept within the borders for security, surveillance or sabotage mitigation approaches.

This will soon be obsolete and will change fast. ESG risks will now add a different layer of filtering dimension to the beforementioned concerns that will change the global investment and trade flows. 

Companies Need to Transform

Normal ways of supply chain management are not deemed capable anymore to ensure robust business continuity.

Business models from companies are now changing. The global supply disruptions and restrictions have required companies to transform the very fundamentals to the value chain as a whole by remodeling business strategies and resilience capacity across operations. Companies now are diversifying their lines of production by also expanding the reach of secured and credible value chain across borders to ensure operational supplies are not interrupted.

Companies are also looking to implement structural changes by improving investment in technology and innovative solutions due to the demand of the present pandemic circumstances as well as a part to ensure business efficiency.

These are just gist of the transformation required but companies’ Boards and management need to realise that the value chain management transformation requires a more complex approach to ensure the change in supply chain management would be profitable and sustainable in the long term.

Focus on Domestic Suppliers

The supply disruptions due to COVID-19 cause companies to be looking inward towards suppliers within the border to secure readiness, availability and cost efficient (in some cases) supplies for operations. But how does this affect local businesses?

The government and regulators play the key role in the need to enhance and communicate the existing policies towards empowering local businesses to reach the capacity and capability to meet demands in the market, investment and trade.

Governments and regulators, and even private firms need to come together to re-strategise on approaches to ensure local business resilience through dynamic supply chain management. One of the ways this can be achieved is by investing and advocating in technological and innovative solutions. Certain sectors are less affected whilst dealing with the pandemic such as the energy sector that have certainly been paving ways for innovative thinking and solutions to mitigate the current pandemic crisis.

Local businesses also in need of support towards developing enhanced business models as well as diversification portfolios. This emphasis should extend to other sectors such as health and medical industries, technology as well as food producers.

The need to rethink on the critical goods and services for domestic production should be increased to meet market demands.

Focusing on market presence and reputation by local suppliers should be driven diligently. Their goods and services should be competitive and aligned with national and international standards to stand out as the suitable or better alternative to the market.

Conclusion

Companies need to transform to adapt and sustain in this new business environment that has majorly impacted the traditional global supply chain management. Securing sustainable supplies for operational business continuity should be one of the forefront agendas for companies in dealing with the new norm from COVID-19 pandemic, but also other unprecedented ESG risks in the future.

 

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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AI is all good for Environmental Sustainability? Think again.

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Introduction

Artificial Intelligence (AI) have now known to poses both strategic advantages and risks. The investment on AI hardware and software is gaining traction and will continue to rise as more and more companies are undertaking AI-driven projects as means to move forward.

AI could either be a contributor to a company’s carbon footprint or even could be a tool the to mitigate a company’s carbon emissions.

Business leaders nowadays are becoming more stringent on their companies’ environmental issues and foresee the adoption of AI will help to address environmental issues impacting from its operations. However, information on the impact AI has on the environment, as well as the management approach by the companies’ Board and Management has not been adequately discussed.

 

Carbon Footprint of AI

AI systems and platforms are required to manage and process substantial deal of data, expanding the server capacities and are dependent on energy to cool data centres. This will directly cause the increase in energy consumption by a company.

Based on a research by the University of Massachusetts, it was found that training AI models to undertake Natural Language Processing (NLP), may project 500% carbon dioxide equivalent more of an American car lifetime emission.

Though that the finding is shocking, bear in mind that this is based on a study for one specific AI type and not that has been commonly adopted. Definitely, more studies on various AIs are needed for us to gauge the environmental impact of AI.

From this research, we can see the importance to extend our understanding on the carbon footprint of all AI categories. This would ensure we are able to set the responsible guidelines and standards to evaluate the environmental risks of AI before the investment made by companies to integrate AI-based system into AI-driven projects as a norm.

The Board and Management of a company need to be aware and take actions to include AI’s environmental impact to be included in the risk management processes as if failure to do so may lead to reputational or even financial impact to the company. The Board and Management should also eventually consider to AI’s environmental impacts to be part of the operational decision-making processes.

 

AI in Helping Companies to Mitigate Environmental Sustainability

Rather than focusing on high-capacity internal projects that aim to mitigate environmental footprint, companies may opt to engage with a data centre cloud provider for AI training and processing. A few technology companies have began taking these initiatives. An example is Google’s public cloud offering i.e. Google Cloud Platform. Google’s DeepMind division has developed self-thought AIs to lower energy consumption to cool its data centres. Overall, Google has managed to lower its data centre energy requirements by 35%. Another option is Microsoft via Microsoft Azure also runs high-capacity data centres. It’s also interesting to note that Microsoft has committed to be carbon negative by 2030.

Many are also aware that AI can elevate sustainability for various industries from agriculture, transportation, manufacturing, and many more. Here is a list of how AI plays the net positive contributor to the environmental sustainability:

 

• In agriculture, AI can transform production by better monitoring and managing environmental conditions and crop yields. AI can help reduce both fertilizer and water, all while improving crop yields. Companies in this sector include Blue River Technology, Harvest CROO Robotics and Trace Genomics.
• In energy, AI can use deep predictive capabilities and intelligent grid systems to manage the demand and supply of renewable energy. By more accurately predicting weather patterns, AI can optimize efficiency, cutting costs, and unnecessary carbon pollution generation. Companies in this sector include Stem, ClimaCell and Foghorn Systems.
• In transportation, AI can help reduce traffic congestion, improve the transport of cargo (supply chain logistics), and enable more and more autonomous driving capability. AI will eventually help with the “last mile” delivery problem and reduce the need for delivery vehicles. AI can help businesses with demand forecasting, helping to reduce the amount of transport needed. Companies in this sector include Nutomony, Nauto and Sea Machines Robotics.
• In water resource management, AI can help reduce or eliminate waste while lowering costs and lessening environmental impact. AI-driven localized weather forecasting will help reduce water usage. Companies in this sector include Innovyze, Kurita Water Industries and Plutoshift.
• In manufacturing, AI can help reduce waste and energy use in production facilities. Robotics can enable better precision. AI can design more efficient systems. Companies in this sector include Drishti, Cognex Corp and Spark Cognition.
• In facilities management, AI can help recycle heat within buildings and maximize the efficiency of heating and cooling. AI can help optimize energy use in buildings by tracking the number of people in a room or predicting the availability of renewable energy sources. Companies in this sector include Aegis AI, IC Realtime and IBM’s Tririga.
• In materials science, AI can help researchers find new materials for solar panels, for turning heat back into useful electricity and to help find absorbent materials as components of CO2 scrubbers (taking CO2 out of the atmosphere). Companies in this sector include Citrine, Matsci AI and Ansys.

 

Conclusion

Though there are plenty of opportunities and evidences that AI adoption facilitate companies to improve its environmental sustainability, it is important for companies to be aware that AI has also the potential to produce significant carbon emissions, and also has the potential to offset or reduce those carbon emissions. Companies need to understand how this can affect the operations and financial performance. As companies are pressed to be more transparent in managing its sustainability issues, companies would also need to monitor and disclose on its strategy and performance related to AI and its impacts, thus questions on its effectiveness to mitigate carbon emissions as well as threats imposed on the environment, would also likely to be asked by the stakeholders.

 

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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Impacts of Climate Change on Sports

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Sustainability and sports. There are not many talks or disclosures to gauge the Sustainability (environmental issues in particular) impact on the sport sector. However, the influence of sports reaches out to a wide range of society across regions, age groups and genders, and provides a united social platform for more sustainable behaviours. Sports organisations are encouraged to be more progressive in becoming more sustainable to deepen connections with current and new fans while increasing business performance.

Environmental impacts should really be one of the focus areas for certain sports, such as outdoor winter sports and surfing. These sports are directly affected by climate change. Organisers will face the difficulties to host sporting events such as the Winter Olympics due to the decreased winter periods, and the changes in ocean tides and waves could force current surfing venues to be relocated.

Climate change may also resulted to increase in rainfall that could lead to flooding, and this has already affected cricket events in England and India. The increasing occurrence of intense wildfires that caused detrimental air quality had caused disruptions to the Australian Open in early 2020 and also caused cancellation of baseball games in Seattle. These are just some examples of how climate change are limiting the existing sporting events and the trend is likely to remain.

The business financial implications due to these cancellations are severe. For instance, the infamous Hurricane Harvey had forced the displacement of Houston sport business and clubs needed to participate in extended road games due to the fact that it was just not possible to host games especially for fans to crowd the stadiums.

Apart from that, the locations of the sporting facilities and stadiums are at risks of climate change, especially at coastal areas. The coastal areas are threatened by rising ocean sea levels and have high likelihood of facilities flooding with damaging effect.

Based on what has been mentioned so far, it is quite vivid to see how detrimental environmental i.e. climate change issues impose on sports, to both organisers, sport clubs and also the fans. 

Sports organisations’ environmental impact assessments tend to lack certain important aspects. Normally, sports organisations would only look at short impact on the facility or sporting event itself. They also need to focus on the externalities that poses direct environmental impacts that include carbon-producing transportation of teams and fans, food consumption and waste production.

It is also observed that sports organisations have not reached out enough to external stakeholders and experts on environmental initiatives. Like many other businesses, this is probably due to the lack of awareness and direction from the organisations’ management on the overall value from the initiatives.

It might be a surprise to some to know that fans are actually keen on and even participate in reducing sporting events’ and their own environmental footprints during a game. This is evident in environmental awareness campaigns that advocate fans to increase the use of mass transit, increase waste recovery and purchase carbon offsets to mitigate personal impacts when attending a sporting event.

Events surveys are helpful to formulate and assess the social and financial returns on investment of the said campaigns. The change of behavior to be more environmentally friendly does not only occur during a sporting event, but it leads to day to day behavior changes in sustainable living of individuals and local communities.

Sports organisers could also benefit financially from these initiatives and investments. Environmental initiatives are attractive for certain categories of fans such as the millennial.  They view these initiatives and investments to uplift their sports organisers’ brand perceptions and will drive towards lucrative returns in merchandise sales. The advocacy on environmental sustainability by organisers can be benefitted to promote a social norms of sustainable living that can lead to obtaining corporate sponsorships by other sustainable organisations.

Sport organisations should take the first approach of assessing their environmental impacts before begin to invest in initiatives to gain financial and social returns.

The Seattle Mariners had conducted its energy audits and facility upgrades. It was found that it has managed to save significant amount of energy and cost. Another example is the Ohio State University Athletics Department that extended its waste management programme of its facilities to the surrounding community to achieve zero waste. Some also extended their initiatives to the fans such as the Philadelphia Eagles and Seattle Sounders offset their teams’ carbon emission through carbon offsetting programmes including facility operations, team travel and fan travel.

Another energy cut saving initiatives is seen at Levi Stadium of San Francisco 49ers. The organisations are consuming renewable energy featuring solar panels. This is also seen at the Johan Cruyff Arena in Amsterdam that features battery arrays that are capable in storing enough energy to meet the consumption of an entire event.

Another interesting example is from a football club in England. The Forrest Green Rovers had come up with a design to build a stadium that will be completely made out of sustainably sourced wood. The team’s current facilities are powered by 100% renewable energy. The facilities’ concessionaires only features plant-based food items. All of these efforts play a substantial role in minimizing its environmental impact.

 

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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Why is it Difficult to Develop Better ESG Case Studies?

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Introduction

Does Environmental, Social and Governance (ESG) management bring financial returns to companies? That is the common question that from companies when they are encouraged to go beyond reporting compliances.

Whenever companies are being asked on the limitations to uplift their sustainability management, one of the common responses is budget restrictions. To them, investing in environmental protection or in the workforce wellbeing or other social issues would bring no or little financial profits to shareholders.

Failure to present convincing insights on the financial outcomes, will make getting companies on board to focus on sustainability issues to always remain a challenge. But since the Covid-19 pandemic has impacted business around the world, only now companies have started to realise the severe effect in putting sustainability risks on the side-line.

It is in fact not a new discovery that integrating ESG considerations into business strategies is not only important to mitigate external risks, but also profitable as well as important to customer allegiance and protecting against the rising number of major threats to social stability, vibrancy, and inclusivity.

 

But why is it difficult to build sound and comprehensive ESG business case?

Variations of ESG reporting – Companies around the world, in different sectors as well as different regulations, are self-reporting using different ESG metrics. Particularly for early reporters, the majority of ESG reporters disclose data and information that are not audited hence the accuracy and credibility of the disclosure are not determined. Hence, it is a challenge to validate and compare ESG performance clearly.

Limited standardisation of ESG ratings by third parties – Third-party ESG data providers are organisations outside of reporting companies. These third parties would normally use different data and rating systems, resulting in a substantial deviation of assessments.

Unclear linkages of the reporting ESG metrics to the effectiveness of ESG strategies – Many companies tend to report on whatever they have, including based on the operational initiatives in place pertaining some material matters but not directly derived from the companies’ overall ESG strategy. This restricts companies to gauge the effectiveness of the ESG strategies as the data they are monitoring is not exactly the data that they need to focus on to deliver value creation, rather than the data that they have for annual reporting purposes only.

Clear segregation of ESG metrics with financial metrics – As mentioned earlier in the article, qualifying the financial outcome of ESG initiatives could be difficult. To date, only few companies are able to track the return of ESG initiatives to their overall business revenue, and even lesser companies can provide comprehensive and consistent data.

Intangible ESG values are not easily measured – Companies often find that accounting is not the best tool to measure ESG performance as there are a lot of variables to monetise ESG values that are intangible that to date is over 80% of companies value.

To work on building a good business case, we also first need to understand the relationship between ESG and the overall business financial performance.

Companies by now should understand that integrating ESG into business operations is not just mere through corporate social responsibilities programmes. ESG integration should be aligned and centred together with business corporate strategy. A few research has found that companies that have integrated ESG into their core business outperform companies that have not in financial performance as well as stock market performance. This is because these companies strategically focus on managing the material matters that truly have impact on the business and stakeholders. This kind of research is widely available, but it is not good enough to be considered as sound business case for ESG. This is mainly due to the fact that there are still inadequate presentations on the details of how the management strategies or efforts actually work in making performance enhanced or profitable. This is why top leaders are not able to be relate and be convinced the ESG management levers that push towards financial performance.

Case studies on financial performance from sustainable investment on the other hand, have been rather complex due to various investment strategies having different performance profiles. For instance, in reference to negative screening (avoiding investment in industries, such as tobacco or weapons, that work against certain values or social goals) may limit performance as it reduces portfolio range and diversity. But currently, negative screenings that omits coal portfolios are doing well.

Regardless of these research complexity, the trend of ESG performance is showing that there is positive correlations between good ESG performance, stock price, cost of capital, and operational achievements.

 

Conclusion

A clearer business case on ESG’s financial impact are still needed to provide companies to relate and get inspired to make the move towards sustainability excellence. The business case will pave way for companies to scale up their investments in ESG in the face of pandemics like COVID-19, as well as other pressing issues such as climate change, inequality, and many other perceived or real challenges to their bottom lines. The companies’ commitment to meet its fiduciary duties as well as overseeing ESG performance should go hand in hand.

 

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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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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