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Demystifying sustainability risk

Sustainability’s evolving role in business has created new risks. See how the COSO Framework can help your organization’s risk management.

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Customers expect it, employees demand it and shareholders rely on it. Sustainability has gone from a feel-good initiative to a strategic imperative.

In today’s highly competitive markets and volatile economic environments, no organization – especially those that rely on limited or declining natural resources – can operate the way they did a decade ago.

Consumers are more sophisticated, driven, in part, by the wider availability of information, increased visibility into corporate business practices and a better understanding of the interconnectedness of all that we do. The pressure to succeed in a manner that supports sustainability principles is growing rapidly.

The confluence of risks and opportunities associated with environmental, social and economic performance has made sustainability a strategic priority for companies.

In a recent EY report, Turning risk into results, we found that organizations with more mature risk management practices outperform their peers financially. Top-performing companies, from a risk maturity perspective, implemented on average twice as many of the key risk capabilities as those in the lowest-performing group.

Additionally, according to another EY publication, Leading corporate sustainability issues in the 2012 proxy season, institutional investors increasingly believe that an organization’s social and environmental policies correlate strongly with its risk management strategy — and ultimately its financial performance.

Embedding sustainability into the organization’s Enterprise Risk Management (ERM) program offers a clear opportunity to increase the effectiveness of risk management practices and improve business performance.

The Committee of Sponsoring Organizations of the Treadway Commission’s (COSO) ERM Framework has historically provided a good starting point for organizations as they begin their ERM journey.

Organizations that choose to embed sustainability into a COSO-based risk management program can achieve the following competitive advantages:

Alignment of sustainability risk appetite to the organization’s corporate strategy and the new world view of company value
Having a holistic view of sustainability risk that looks across the entire enterprise enables organizations to do a better job of anticipating and responding to issues as they arise.

Expanded visibility and insights relative to the complexity of today’s business environment
Embedding sustainability into an organization’s ERM framework enables the sustainability function to gain valuable insights about the risks the organization faces and the materiality of those risks. These are insights the sustainability function can then share with management and the board so that they have a clear understanding of the sustainability risks relative to the complexity of the business environment.

Stronger linkage of company values and non-financial impacts to the organization’s risk management program
Identifying sustainability risks and opportunities can be challenging. Organizations that understand how to link them to their value drivers are better able to understand the impacts on the business in non-financial ways.

Better ability to manage strategic and operational performance
Organizations can create competitive advantage by managing sustainability risk to improve business performance, spur innovation and boost results. Companies that conceive their products or services through a sustainability lens will attract funding from external investors and boost stakeholder confidence.

Improved deployment of capital
Organizations that have used the COSO ERM Framework to embed sustainability risk management practices have better opportunities to allocate capital more effectively or send the right messages to stakeholders based on the organization’s corporate values and strategy.

Momentum is building for a more integrated approach to sustainability and the risks that it poses. By incorporating these risks into COSO’s ERM Framework, organizations will be able to gain a complete view of where they are on their sustainability journey — and how to best capture value as they go.

For more details, please view the full document.