“In the enterprise risk community, we are used to talking about black swans – these unpredictable events, and unintended consequences. But there’s a new theory out there around ‘grey rhinos,’ where you have a number of things that are charging right at you, but you have bias against them and so you may not choose to mitigate them. I tell the board this about climate change as well as ESG: these are your grey rhinos, they have been coming at us all this time.”
Lisa Groff, VP and Chief Risk Officer, American Electric Power (AEP)
For a long time, too many organisations have seen ESG (environmental, social and governance) as something of an abstract concept. Yet recent events – from COP26 to global social instability to the COVID-19 pandemic – have shown ESG issues have the capacity to fundamentally change the global business landscape. They’ve highlighted how crucial it is for businesses to monitor emerging risks and opportunities, and how quickly issues can become financially material. It’s therefore clear that we can no longer look at ESG in a siloed way. However, too many senior executives are either insufficiently prepared or, even more concerningly, continuing to bury their heads in the sand. So how do we show them the importance of monitoring external and emerging risks, like ESG?
Financial and reputational gains
Financial effects lead to reputational effects lead to financial effects. The alternating steps of the cycle should not be considered in isolation.
The business case for ESG rests on the interdependency between different areas of our operations. Disruptions in the supply chain, for example – something highlighted particularly by the COVID-19 crisis – mean a direct financial cost as a result of lost productivity, opportunity, and more. Global disruption is becoming increasingly common in an interconnected world. By not integrating ESG into their core strategic discussions, companies risk not only financial losses but reputational costs, which lead to further questions of credibility.
That credibility hinges on authenticity in dealing with all stakeholders, from workers to investors. The key to being authentic is clear and consistent reporting, as well as direct engagement. Speaking with the management team helps them understand the seriousness of their commitment. It’s important that we understand the purpose and process behind defining those priorities, and know that executives are on top of how these risks evolve. The direct financial impact of failing to factor ESG issues into its everyday business practices will also affect an organisation’s ability to secure financing, with banks no longer ignoring ESG.
A materiality assessment
Materiality is a concept that defines why and how certain issues are important for a company or a business sector. A material issue can have a major impact on the financial, economic, reputational, and legal aspects of a company, as well as on the system of internal and external stakeholders of that company.
As with many areas of the modern organisation, data can highlight the improvement needed to achieve better board oversight. It’s important that businesses improve their risk management processes and support the board with consistent data on ESG, adopting a dynamic approach to external risk monitoring. A materiality assessment can help you identify and understand the relative importance of specific ESG and sustainability topics to your organisation. This involves looking at their potential impact on your organisation and their importance to stakeholders. Senior executives need to understand who all their stakeholders are and why they should care about them.
A digital platform that tracks existing and emerging risks, and can keep up with the increasing torrent of data in our digital world, helps sustainability professionals convince board members of the importance of a specific issue or strategy. At the same time, it provides a solution for senior decision-makers to be accountable for their decisions. When business leaders can put their trust in the relevance and accuracy of that data, you truly have a robust platform for future success.
But it’s not enough to check on ESG issues once a year to see how you’re doing. These issues emerge, change and re-emerge every day. Your monitoring needs to be continuous. By creating a dedicated process owned by the risk management team, working in close collaboration with the ESG or sustainability team to regularly track and assess risks – not just during major crises – you can facilitate regular boardroom engagement and ensure timely action on issues of concern.
If there’s one lesson we can all learn from the events of 2020 and 2021, it’s that risks from the outside world – public health, climate change or diversity and inclusion – are increasingly manifesting themselves and having stronger financial impacts. In the media age, people are increasingly aware of these issues – and increasingly keen for answers and transparency.
ESG needs to be a priority for corporate leadership. Senior executives and board members need to be willing to assume responsibilities beyond the walls of their own operations; to recognise that they’re accountable to more than just their shareholders. Companies that do not adopt this mindset will not only be left behind, but will also risk their very existence.
Datamaran is the only software analytics platform in the world that identifies and monitors external risks, including ESG. Trusted by blue-chip companies and top tier partners, it brings a data-driven business process for external risk and materiality analysis in house – at any time.
Datamaran’s patented technology offers real-time analytics on strategic, regulatory and reputational risks, specific to your business and value chain.
About Maeva Charles
As Datamaran’s VP of Partnerships and Client Solutions, Maeva accelerates Datamaran’s growth through multi-channel distribution with carefully selected organisations. She focuses on identifying the right partners, needs and solutions, and establishes trusted relationships with global organisations.
With a combination of risk management and sustainability expertise, Maeva supports clients in using Datamaran to strengthen business processes through ESG integration. She is a technical expert, and actively contributes to product development, including their latest innovation: Datamaran for Executives.