Aligning ESG risks with existing ERM program key for creating value, attracting talent

Environmental, social and corporate governance (ESG) is a multidimensional term for strategies, reporting and action plans on various factors that impact an organization's sustainability. ESG presents an opportunity to build a more sustainable business and can be a key differentiator to enhance relevancy and trust with an organization’s stakeholders. These include external stakeholders (investors, customers, communities and regulators) and internal stakeholders (employees, management and board members). Built strategically, an ESG program can create value within an organization and be a catalyst to attract and retain talent by aligning ESG risks with your existing enterprise risk management (ERM) program.

Collaboration, coordination and leverage 

A successful and holistic ESG function should build on an organization’s ERM program and align with the organization’s strategic initiatives and priorities. This requires collaboration, coordination and leverage. 

The collaboration is among existing ERM functions (the board, executive management and risk owners) and perhaps newer ESG functions to facilitate a comprehensive risk management program. This includes knowledge sharing, education and leveraging the skillset of each function to understand, identify, evaluate and address risk and recognize opportunities across the enterprise.   

Coordination includes developing comprehensive risk management reporting for management and the board that incorporates both ESG and ERM risks. 

Finally, organizations should leverage their existing risk management processes to incorporate ESG and ERM; there is no need to start from scratch regarding ESG-related initiatives. 

Seizing the opportunity

Many organizations identify talent management, cybersecurity, and community relations as risks within their ERM program. Likely, organizations have deployed different initiatives to address these risks. For example, an organization may struggle with attracting and retaining talent; managing employee performance; training and developing employees; planning for succession; and addressing workforce shortages.  

Existing ERM mitigation plans may include initiatives for employee engagement, development programs, and commitment to a diverse, equitable and inclusive culture, all of which align with ESG-related initiatives. An organization may address retention issues by deploying employee engagement surveys and action plans to address concerns and improve employee experience. It may address talent gaps by evaluating campus recruiting strategies to support a diverse candidate pool.  

ESG strategy and metrics

Developing a successful ESG strategy requires engaging both external and internal stakeholders. Identifying data and information related to ESG risks provides organizations with the ability to evaluate the effectiveness of their ERM mitigation plans and ESG-related strategic initiatives. These metrics can inform an organization and provide visibility to where additional efforts may be needed to address the risks. 

Organizations also should perform a benchmarking exercise to review risks identified by competitors, peer organizations or associations (like the Sustainability Accounting Standards Board (SASB)) to gather insight on the applicable risks they have identified. This exercise will help to create a comprehensive evaluation of relevant ESG risks. 

The next step is to perform a materiality assessment to evaluate the impact of each risk and the likelihood it will occur. Some of the impacts to consider for each risk include: 

• Alignment to organizational strategy, mission, vision, and values​
• Liability or fines incurred​
• Regulatory and policy requirements
• Disruption to operations
• Supply chain considerations
• Cost of operations
• Reputation
• Consumer product preference
• Strategy and innovation

This exercise will help an organization define the applicable tolerance level for each risk. For example, ESG-related metrics for evaluation and reporting of talent management related risks may include:

• Voluntary and involuntary turnover
• Employee engagement surveys
• Diversity of employees

Materiality matrix

Once an organization has identified relevant sustainability issues, it can undertake a materiality assessment. This is a way for an organization to identify and prioritize which ESG initiatives have the most impact and influence on an organization’s stakeholders. The results can serve as a guide to determine what an organization should focus on related to ESG. ​​

Some of the benefits of a materiality assessment include:

• Analysis of business risks and opportunities
• Increased chances of better meeting stakeholder requests and demands
• Identification of emerging sustainability trends that the company should assess
• Identification of topics to measure and improve

The results and data can be used to identify disclosures and initiatives in public sustainability documents. 

In order to complete a materiality assessment analysis, an organization should: 

• Identify key issues/topics, relevant stakeholder groups, and business drivers
• Collect data from internal and external stakeholders
• Map and prioritize topics
• Align with key management for strategy and initiative development
• Report on progress and iterate

Challenges

An organization faces many challenges to successfully incorporate ESG strategies into its existing ERM program, including:

• Undefined ESG strategy
• Inadequate ESG ​governance ​framework
• Inadequate and ineffective controls over ESG related commitments and road maps to achieve success
• Incomplete and inaccurate data for reporting ESG related disclosures

As the organization looks to address these challenges, there are some broadly applicable and industry-related questions to consider:  

Broadly applicable questions

• Does your organization have a governance strategy to support ESG?
• Is ESG considered in your organization's risk assessment and long-term strategy?
• What ESG information and data are internal and external stakeholders asking for?
• Is your organization subject to regulatory requirements or reporting for ESG?
• Are existing systems sufficient to supply complete and accurate ESG information and reporting?
• What controls or procedures are in place related to ESG communications and reporting? 
• Who has ownership and accountability for ESG information?
• How do you view ESG as part of your strategic objectives and competitive differentiation?
• Have you explored integrating new technology tools that automate ESG data collection and improve reporting efficiency?
• If applicable, have you prepared for the pending SEC disclosure requirements and understand the Task Force on Climate-related Financial Disclosures (TCFD) framework and Greenhouse Gas Protocol for quantitative disclosures around greenhouse gas emissions?

Industry-related questions