Why sustainability should be key to enterprise risk management

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The COVID-19 pandemic has highlighted the diverse web of interconnected factors that can impact a business, demonstrating more clearly than ever that siled thinking is not the way to go, especially when it comes to is about managing risk.

“Traditional risk management looks at financial risks, and companies used to look at risks in silos like financial risks, health and safety risks, etc., but now we’ve seen that a crisis or risk can create a domino effect; we have therefore seen that the pandemic is a health crisis which has created a humanitarian crisis, a monetary crisis and an economic crisis. It showed businesses that the time for siled thinking is long gone,” says Dr Allinnettes Adigue, ASEAN Regional Center Manager for the Global Reporting Initiative (GRI), the independent international organization that provides the standards most widely used in the world for sustainability reporting – the GRI Standards.

“The pandemic has shown the vulnerability of supply chains, the lack of resilience also the interdependencies and interconnections of our world”, recognizes Constant Van Aerschot, director of the WBCSD (World Business Council for Sustainable Development) Asia-Pacific. “If somewhere a link in the chain is broken, it means that the whole chain is broken. What we have seen is that those companies with intact value chains have actually benefited from the pandemic. Some made record profits because they were able to deliver where their competitors could not. Those with intact value chains are generally more advanced on ESG, as they will engage more with stakeholders. »

Adigue agrees that there have been winners and losers from the pandemic – with sustainability-focused organizations leading the way. “A BlackRock study published in the middle of last year found a correlation between companies that performed well during the pandemic and those that were in the Dow Jones Sustainability Indices (DJSI) – meaning they were committed to sustainability. business sustainability. It showed how this strategy has had a positive impact on them in a crisis,” she says.

The importance of ESG

These results show that ESG is becoming a factor with a huge impact across an organization, not just within a silo. Increasingly, it is becoming a key consideration for risk managers. This has been evidenced in many recent events – for example, the bankruptcy filing by PG&E, the Pacific Gas and Electric Company in the United States, which is a Fortune 500 company, was the result of the American wildfires which damaged a large part of its physical assets.

“It was an environmental cost event; because of climate change we have massive forest fires and as a result it has damaged the physical assets of the business which has impacted the solvency of the business – and because of that they had to file for bankruptcy,” explains Adigue.

“It has also sparked a discussion of political issues and regulatory risks, as it is now recognized that climate-related disasters will increasingly add financial stress to stakeholders in the utility sector. Companies must therefore now take into account the costs of climate change and this cost can be transferred to the cost to customers. This illustrates concatenated risk – how one crisis or risk can create and affect many stakeholders. »

Similarly, Van Aerschot highlights how extreme weather events and climate change must now be taken into account in companies’ risk mitigation strategies.

“EDF, the utility company in France, is facing drought, which means less water – which means it can’t cool its nuclear plant. It’s a natural hazard that will have repercussions on the nuclear industry. Another example is ArcelorMittal, a global steel manufacturer. They have embarked on the restoration of the mangroves around the Great Lake in the United States because if they do not have water, they do not cannot use their manufacturing plant on the shore of the lake to make steel.If the water table drops, they have to stop production.It is therefore essential for a company to include natural capital and natural disturbances in risk management.”

Risk as opportunity

A recent webinar titled Align sustainability and risk management, hosted by GRI and featuring Van Aerschot and Adigue, explored the ways in which sustainability shapes the role of risk managers, increasing their relevance in the process of organizational transformation.

The WBCSD defines a sustainability risk as an uncertain social or environmental event or condition that, if occurring, may have a significant impact on the business, but which, on the other hand, includes opportunities that may be available for an organization due to social or environmental change. The factors.

In Van Aerschot’s opinion, the role of Chief Risk Officer should be renamed “Chief Risk and Opportunity Officer” – because of the inherent opportunities inherent in risk.

“For example, it’s possible to ensure that you can ride out any supply chain disruptions,” he says. “The question is whether risk managers are actually changing the way they manage risk: are they integrating ESG into their risk assessment? We found that there is a mismatch between risk filings at stock exchanges, sustainability manager and materiality risk assessment. There’s little or no alignment, and on the one hand you have the natural capital, the social capital, the ESG world, which captures those risks in a way that the traditional risk manager doesn’t. don’t. The changing business landscape includes the need to talk to stakeholders and the supply chain, which means risk managers need to change the way they view risk.

Adigue agrees that some companies that have flagged sustainability issues in their sustainability reports do not identify them in their risk conclusions. “Companies miss the value that a sustainability report would bring to their risk management,” she says.

To help companies adopt a more integrated approach, the WBCSD has created a diagnostic tool which helps companies understand the extent to which ESG-related risks are currently integrated into their ERM processes and structures.

“It looks at whether ESG risks align with the enterprise risk management filing on the stock market – so there are resources to support new ways of managing risk,” says Van Aerschot. He adds that ESG risks require a dynamic approach to risk assessment. “You have several interconnected risks that together form a cluster that can result in a more severe aggregate impact than the most severe individual risk. So the traditional way of looking at single events in a 2×2 matrix (impact versus probability of occurrence) no longer applies to ESG. A dynamic approach to risk assessment can change the conversation in the boardroom.

A new approach

For many risk managers, sustainability is a new consideration, but no doubt it will increasingly fall within their remit. During the recent webinar, speakers highlighted the fact that while the CRO role was more common in financial institutions, more and more non-financial companies are appointing CROs – and the CRO role will beyond risk management, risk and regulatory compliance, and increasingly includes the management of risks related to sustainable development, i.e. the environmental, economic and social factors that could have a impact or pose a risk to the business.

In addition to the role of chief risk officer, the risk committee at board level has an important role to play. Again, communication is key.

“At the board level, the question is how competent the board is on sustainability issues, whether these issues have been discussed and whether there is a dialogue between the risk manager, the sustainability director and the risk committee at board level,” says Van Aerschot. . “It’s a question of governance: how do you organize the risk function within your company, and who talks to whom?

The new, expanded role of the chief risk officer encompasses reputation, ethics, compliance, corporate responsibility, sustainability, and possibly even audit and investor relations. And in addition to having a board-level risk committee, many companies are now creating board-level sustainability and ESG committees.

“Because everything is interconnected, it’s probably only a matter of time before the board committees are merged,” notes Adigue.

“Because companies are now aware of sustainable development, we are witnessing an internal revolution for companies”, she continues. “Different leadership positions within the company could drive sustainability across the organization – so we’re seeing it’s not just the role of the CSO, not just the role of the CEO or even the chief risk officer : Everyone in the business has a role to play. Today, we see companies reorganizing their structure and examining the way they do things, in an effort to do things better. Silo thinking is a disease of organizations , and because of sustainability, we see more cooperation within the organization.They are aware that everything is interconnected.

Global Reporting Initiative, COVID-19, Risk Management, ESG, Insurance, Reinsurance, Allinnettes Adigue, Constant Van Aerschot, Global

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