5 Steps for Integrating ESG Risks into ERM

New guidance from COSO & WBCSD on ESG risks and opportunities
5 Steps for Integrating ESG Risks into ERM
Publ. date 24 Oct 2018
According to the World Economic Forum’s Global Risks Report in 2018, four of the top five risks were environmental or societal, including extreme weather events, water crises, natural disasters, and failure of climate change mitigation and adaptation. Growing interest from investors seeking to understand how organizations are identifying and responding to ESG-related risks is pressuring companies to fully integrate them in their Enterprise Risk Management (ERM). To support organizations in this challenge, COSO and the WBCSD released the final version of the “Guidance for Applying ERM to Environmental, Social and Governance related Risks”. The guidance presents a pragmatic 5-step process to identify and manage ESG risks today while maintaining resilience to adapt and respond to the megatrends of tomorrow.

This Guidance that the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and the World Business Council for Sustainable Development (WBCSD) released is intended to help organizations worldwide respond to the increasing prevalence and severity of ESG-related risks, ranging from extreme weather events to product safety recalls. For the first time, it shows that ESG-related risk management can directly fit into mainstream processes for enterprise risk management.

“We want ESG risk management to be a tool that every manager is looking at.”

Larry Fink, CEO BlackRock - USD$6.3 trillion in assets under management


Addressing lack of ESG risk maturity & transparency

Last year, research among WBCSD member companies on sustainability and risk disclosures revealed that only 29% of material topics as published in the sustainability report were also included in the company’s legal disclosure of risks. Amazingly enough, for 35% of member companies this disclosure dropped to zero(!) demonstrating a feeble link between sustainability reporting and Enterprise Risk Management.

Furthermore, discussions and surveys with risk management and sustainability practitioners indicated that most practitioners (89%) agreed that sustainability risks could contain a significant impact on business. At the same time, more than 70% of the practitioners claimed that “risk management practices are not adequately addressing sustainability risks”. The current released guidance is designed to fill this gap, to help businesses and other organizations enhance their resilience against the increasing prevalence and severity of ESG-related risks.

Applying ERM concepts and processes to ESG risks

The outcomes formed a critical starting point for WBCSD and COSO to work together to help businesses navigate and prioritize sustainability risks. Following an extensive public comment exposure, the new guidance is now available. It is designed to help risk management and sustainability practitioners apply enterprise risk management (ERM) concepts and processes to ESG-related risks. It helps entities, including businesses, governments and non-profits, better understand the full spectrum of these risks and to manage and disclose them effectively.

Five key steps: Governance, Strategy, Performance, Review & Disclosure

In summary, the guidance has five chapters that mirror the five components of the COSO ERM Framework. It starts with governance and culture, strategy and objective-setting, then moves through the ERM process focusing on performance (identifying, assessing and prioritizing and for responding to ESG-related risks) and finally the review and revision, and information, communication and reporting for ESG-related risks.

Source: WBCSD & COSO

The full guidance report is available at the WBCSD website.

Are you looking for support on how to integrate ESG in your ERM approach?

A materiality assessment is one of the steps in the guidance to understand impacts and dependencies on all capitals in the short, medium and long term. At Finch & Beak, we link materiality assessment outcomes to ERM by including a connectivity matrix integrating business risks and opportunities. If you want to learn more, please contact Josée van der Hoek, Director, at josee@finchandbeak.com or +31 6 28 02 18 80.

About Nikkie Vinke

Seasoned advisor in ESG benchmarking, sustainability strategy and stakeholder engagement. | nikkie@finchandbeak.com

Privacy Notice | Finch & Beak © 2024. All rights reserved.