The commonalities between ESG and ERM and why they matter to your business
ESG (environmental, social and governance) and ERM (enterprise risk management) contain synergies that may not be obvious to business leaders but make a marriage between the two both logical and formidable.
ESG is a measure of how an organization is performing with respect to sustainability. The concept has been around for decades and the term was developed in the early 2000s, but the meaning can still feel ephemeral.
This is due to the lack of definitive and uniform guidance on what it means and how to implement and measure results. In most business environments, the primary measure of success is financial performance, and yet ESG has no financial component to measure.
Eventually, sustainability efforts should result in improved financial performance; however, clear data on that point remains elusive as well. That said, many organizations, acting as good corporate citizens and responding to pressure from stakeholders, are developing sustainability goals.
However, without meaningful financial performance metrics or regulatory imperatives, these goals can get lost amid other strategic objectives.
ESG enters the realm of risk management
Placing ESG in the realm of risk management can help an organization keep ESG goals on track. ERM, or any risk management practice, already defines the risk tolerance of an organization and tracks its strategic performance.
Allowable risks are identified based on the strategy a company adopts to meet its business objectives. The risk framework allows the organization to track, monitor and appropriately respond to risks that stand in the way of achieving these strategic objectives.
Replacing a purely objectives-based approach to ESG with a risk-based approach allows management to focus on the importance of ESG. Think of it this way, without direct regulatory requirements, ESG can be viewed as a lofty goal and more a matter of public relations and reputation management than a pursuit tied to measurable results.
Until a business identifies the risks associated with detrimental ESG outcomes, management may relegate ESG objectives to the bottom of the to-do list.
8 reasons for integration
Here are eight key reasons to integrate ERM and ESG:
- ESG is a hot topic that is gaining more prominence.
- ESG influences the overall risk posture of an organization and ESG-related risks should be identified and treated like all other risks.
- ERM provides the framework to operationalize an ESG program.
- In most companies, resources have already been allocated for risk management and these can be leveraged for ESG.
- Risk already has a seat at the table, meaning it is regularly discussed with senior leadership and the board.
- Integrating ESG and ERM reduces duplicative efforts.
- ERM provides a tool to understand the risks associated with strategic decisions and allows for more favorable outcomes.
- ESG can help breathe new life into an existing ERM program.
How to integrate ESG and ERM
So now that we have identified why, the next step is to determine how.
These eight steps can help an organization to integrate ESG and ERM:
- Decide who will be responsible for ESG — designate ESG risk owners.
- Prioritize the most impactful ESG risks for the organization. This is typically done through a materiality assessment wherein the company identifies the priorities of the business and those of its stakeholders and finds alignment between the two, addressing the most material issues related to ESG.
- Determine the risk tolerance, or the risk, the organization is willing to accept in the pursuit of its ESG goals.
- Define the sustainability goals and develop metrics to track performance.
- Create a road map for the future.
- Ensure internal and external goals are in alignment and communicated as one.
- To ensure accountability, decide on the appropriate reporting functions.
- Monitor risks on an ongoing basis and adjust as necessary.
ESG goals on their own can get lost in pursuit of other business objectives. By implementing the mechanisms of the risk framework, either through an existing ERM or other risk management practice, ESG can secure its deserved prominence among other strategic objectives and realize its best chance of success. The result is a formidable combination.
How Wipfli can help
Wipfli advisors can help advance your ESG policies or help you establish a road map. Integrating ESG within your risk management framework may offer an efficient and effective path for moving forward. We can help you establish meaningful metrics and build a reporting practice that creates real value.
Contact us now or learn more on our ESG services page.
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