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Environmental, social and governance (ESG) issues have become more than a priority for policymakers, investors and stakeholders across all industries. This transition to ESG represents a multigenerational journey that touches every aspect of our lives. The publicly announced net-zero commitments by 2050 or earlier by several organizations, and the Gender Diversity Rule approved by the U.S. Securities and Exchange Commission (SEC) are just two of many signals that demonstrate ESG is here to stay across the private and public markets. It’s not a fad, but an imperative. This creates both daunting threats and dynamic opportunities that every organization will need to address in their own way.
Though it's one of the most urgent issues facing the world today, ESG is a complex topic to navigate. We help our clients create disciplined approaches and strategies to their ESG risks, not only to meet the rapidly-changing expectations from consumers, shareholders, employees and regulators but also to catalyze positive societal and environmental impact.
There is pressure on businesses to adopt more socially conscious practices, to reduce their carbon footprint, to be conscious of their brand reputation, to retain the best talent and to craft an approach to governance that continues to evolve with the market.
With the increasing role of stakeholder capitalism across all industries, many organizations feel pressure to report on nonfinancial metrics and the value they create beyond financial profit. However, in this complex and often subjective discipline, the correlation between ESG performance and financial performance isn’t always clear. This is a significant undertaking for businesses, not the least of which is because ESG as an initiative is actually a confluence of business topics and initiatives all pulling together under the umbrella of sustainability.
ESG risks permeate a business in different ways. It’s more than a line on the balance sheet, but rather a strategic, cultural and operational mindset that needs to be embedded across the entire organization. For this reason, there needs to be clearly defined ESG risk strategy and governance. Climate risk is the most material across the ESG spectrum in terms of impact and investor interest. One of the biggest challenges is the overall integration of ESG risks and strategies so individual business units are not working in silos, allowing ESG risk strategy to drift and lose focus. It’s a bit like an orchestra where each business unit needs to own a part of the overall ESG risk and governance strategy and function in harmony for it to work.
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What can you do as the head of your business unit to help craft an effective ESG risk management strategy?
Every leader in the C-suite has a role to play in evaluating their part of the company’s function, the ESG risks that apply and what they can do to mitigate those risks. As with any company-wide initiative, the path to success begins with the CEO.
First line of defense – Own and manage risk
This first line of leaders – the CMO, CPO amongst others – is focused on the provision of products and services to clients, and on managing risk. These are the leaders of the company, the individuals who set the course for how the organization operates and how decisions are made. Their commitment to making ESG risk management a priority is key to getting buy-in from employees.
Second line of defense – Oversee the management of risk
This is the next level of governance, focused on expertise, support, monitoring and challenges; is closer to the day-to-day operations of the business. They have a better sense of what’s working, what’s not and what issues still need to be addressed and strategized against.
Third line of defense – Independent assurance on risk management and control effectiveness
These leaders are focused specifically on auditing and keeping their company updated on the latest changes to ESG policy. ESG issues span across various functions within a company, and ownership of data risks and controls may be unclear or unassigned. The auditing team can help bring structure to this process and ensure that the company is moving forward collaboratively to address ESG.
Every organization will be impacted by the environmental, market and societal forces amplifying sustainability. At the same time, organizations are contributing to these forces and their impact on our planet and society. Stakeholders are demanding more action and disclosure from companies. Companies that fail to adapt face losing access to capital investment and commercial opportunities with sustainability-conscious firms, alongside reputational damage and investor backlash. Companies that are proactive on managing environmental, social and governance (ESG) risks and opportunities can create long-term, sustainable impact and financial value for all stakeholders. There is an opportunity for companies to reimagine the way they do business and their role in their community, their industry and the world. Now is the time to begin that journey.
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