Aligning ESG Risks with Enterprise Risk Management

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ESG risks are now playing a much larger role in contributing to the overall risk exposure of organisations. Incorporating them into your Enterprise Risk Management (ERM) can strengthen your organisation’s understanding of its full suite of risks and enhance overall business performance. The good news is that ERM and ESG risks have a significant intersection. Your ESG GRC does not need to be a fundamentally new capability. Learn about key elements to consider and success factors for your ESG ERM strategy.

Individual jurisdictions are taking different approaches towards building a sustainable business that aligns with Environmental, Social and Governance (ESG) factors. Some governments have developed corporate regulations targeting climate sustainability while some financial regulators have adopted specific requirements regarding ESG disclosure rules. Regardless of jurisdiction, the increased volume and attention on ESG topics have hightened corporate pressures to align with ESG requirements.

ESG risks and Enterprise Risk Management (ERM) have a significant intersection. If you already have solid ERM processes in place, leverage these to address ESG risks as well. ESG GRC does not need to be a fundamentally new capability.

What does the rising attention for Environmental, Social and Governance (ESG) mean for your organisation?

The bottom line is that Environmental, Social and Governance (ESG) requirements are becoming increasingly critical for many large companies, as regulators and investors start to filter out companies that may not be aligned with good ESG practices, and may pose a financial risk as a result. Consumers are also making buying decisions, based on a company’s ESG standings.

ESG risks are now playing a much larger role in contributing to the overall risk exposure of organisations. The rising attention for ESG means that many organisations and financial institutions have to start incorporating associated risks into their risk management strategy in order to remain attractive to investors.

Here at Alyne, we understand that the first step of defining standards and terminology can be challenging for business leaders. As such, we have developed Alyne’s ESG Risk Framework to help business leaders best identify ESG risks applicable to their organisation.

Alyne’s Environmental, Social and Governance (ESG) Risk Framework

The Alyne Environmental, Social and Governance (ESG) Risk Framework consists of 16 ESG Megatrends, which have been further broken down into 95 additional sub-trends. This structure contains more than 300 individual data points which provide your business with valuable information such as quantified ESG Value-at-Risk that can be used in your decision-making process. More importantly, this powerful capability provides a cutting-edge ESG GRC capability that can be integrated with your overall Enterprise Risk Management framework.

How does Environmental, Social and Governance (ESG) Integrate with Enterprise Risk Management (ERM)?

Enterprise Risk Management (ERM) and ESG Risks have a significant intersection. Your ERM ESG approach should leverage existing processes and frameworks, but apply new metrics for evaluating ESG risks and related data.

Key elements to consider when setting up an ESG Governance capability:

  • Clear Ownership
    Determine who is responsible for the ESG Risk Assessment processes. This responsibility is likely to fall under operational risk or non-financial risk teams, or even to a newly dedicated role.
  • Mitigation Strategies
    Strategise on how your organisation can best utilIse information gathered from identified ESG risk analyses. How will you use these conclusions to drive decision-making based the identified ESG risks?
  • Prioritise Risk Data
    Evaluating ESG risk exposure might require multiple data sources. Identify and narrow down the relevant data to include in your analysis – an important step for further process.
  • Reporting Structure 
    Who will consume the risk information and make decisions based on these? Identify a reporting structure that will allow your company to align with regulatory reporting requirements, and take into account key decision-makers, such as operational risk teams, ESG sustainable finance teams, shareholders and of course regulators.

Success Factors:

  • Integrate with existing methodology
    If you have solid and comprehensive ERM processes in place, leverage these to address ESG risks as well. Do not try and reinvent the wheel from a process perspective.
  • Develop a comprehensive view of ESG
    ESG is a broad concept, so extend your ESG scope beyond the environmental factor. Taking too narrow a view on the topic will lead to rework, audit findings and lost effort. In the case of ESG financing, this may also lead to misinformed investment decisions.
  • Account for risks and opportunities
    Make sure to account for both opportunities and risks within a certain Megatrend. Let us assume your organisation produces battery technology. Resource scarcity might be a risk. However, increased demand and technology innovations might be an opportunity.
  • Keep it simple
    ESG risk management may be new to many organisations and your priority should be to understand core risks and gain an overall perspective on ESG risk exposure. Focussing on complex methodology or data structure should follow.

Get a Demo

Contact us to get a demonstration of Alyne’s ESG Risk Management capability tailored to your organisation.

Article contributor: Eunice Cheah.