The Institute of Enterprise Risk Practitioners (IERP®) is the world’s first and leading certification institute for Enterprise Risk Management (ERM).

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Integrating ESG and ERM

What are Environmental, Social and Governance (ESG) practices and how are these related to Enterprise Risk Management (ERM)? Although it may not be as high-profile as other business objectives, it is now high on board agendas because it is being increasingly demanded by employees, regulators and customers who want the organisations where they have vested interests, to be responsible corporate citizens. In turn, ESG is becoming critical to the reputation of the business because shareholders and stakeholders today want to know what their investments are earning for them, and how it is being earned.

These demands are part of a changing risk landscape which has resulted in more complex risk factors; risk professionals need to be aware of these dynamics. The focus is shifting to greater accountability, transparency and sustainability at all levels of operations. New risks – and challenges – are emerging but it is possible to use ERM tools to manage ESG risk as part of a broader risk portfolio, thereby improving the firm’s sustainability in the long term.There are several advantages to managing ESG within an ERM framework, especially since ESG can use ERM structures and processes. Aligning and integrating ESG with ERM programmes also pools resources and reduces duplication.

In turn, ESG can invigorate and accelerate ERM programmes. ESG is about sustainable development; and the factors driving sustainability today are investor, consumer and regulatory demands, the need to attract and retain suitable talent, and increasing productivity. ERM, on the other hand, is about achieving organisational aims and objectives, protecting and creating value. When ESG is integrated with ERM, strategies and initiatives can be implemented to create opportunities for long-term value. Both ESG and ERM are trying to achieve the same objectives, but while ESG may lack clarity in some areas, ERM already has tried and tested frameworks, structures and processes in place.

A major consideration for companies is how to manage ESG reporting, which needs robust disclosure, processes and controls. These are things that risk management is already involved with. As ESG continues to influence the overall risk posture of an organisation, it will require the same level of attention and focus as any other risk. ERM, with its holistic, systematic approach to managing risks, is particularly valuable in this respect as it enables organisations to systematically identify, assess and monitor potential, actual and emerging risk exposures. It should be noted, however, that risk management, including ESG risk management, can also present opportunities.

ESG strategies and initiatives should thus be implemented so as to create opportunities for long-term value. ERM’s structured processes support ESG implementation, since ERM is about managing all risks in the business – and ESG is one of these risks. There are other factors as well. As industry regulations surrounding ESG increase and regulations accelerate, organisations which are perceived as more ESG-conscious are more likely to be safer investments and therefore more attractive to stakeholders. Investors, consumers and top talent are becoming increasingly knowledgeable about what they buy where they invest or who they work for.

ESG-conscious organisations are also more likely to see greater employee productivity and enhanced employee motivation as employees start to feel more engaged and instilled with a sense of purpose at the prospect of being able to give back to society through their work, and create lasting social impact in the communities where they operate. Improved employee experience leads to greater output. Many firms still view ESG as just another compliance exercise, or a cost to be borne without financial benefit but studies have shown that there is a strong positive correlation between ESG investments and financial returns.

ESG has the potential to build long-term competitive advantage, enhance resilience, accelerate sustainability risks and attract socially and environmentally conscious investors, talent and customers. Integrating ESG factors into corporate decision making is good risk management, and managing ESG risk is good because, for business to succeed, all risks need to be managed. Applying the structured tools of ERM will reframe ESG objectives as risks, and help in ESG goal attainment.But ESG can invigorate and accelerate an ERM programme as well; both ESG and ERM can reinforce each other to create more value overall, than either practice individually.

Integrating ESG and ERM can rejuvenate established ERM programmes which may have become boring and tedious. Staff, especially, may find the prospect of making a positive impact through ESG quite exciting. This new energy will help propel any joint ESG-ERM approach throughout the business, spurring those who may feel jaded to re familiarize themselves with ERM processes. Additionally, in the absence of a formal ERM programme, ESG can be the catalyst that kick-starts a properly-designed, objective-centric risk programme.Firms which are looking to transform sustainability into a competitive advantage, must look at five main areas.

These are stakeholder expectations; the organisation’s commitments; the most optimum way of infusing ESG into organisational strategy; creating value through innovation and technology; and communicating outcomes through appropriate governance and disclosures. Business strategies should thus incorporate economic, environmental and social factors, especially since sustainability is now a major business priority. Many firms regard it as a viable means of accessing capital and investments, which also supports their efforts to attract and retain employees. Overall, they see sustainability as very much a part of their measures to increase productivity and competitiveness.

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