Integrating Environmental, Social, and Governance Risks into Enterprise Risk Management 7 May 2018
World Business Council for Sustainability Development MISSION: To accelerate the transition to a sustainable world by making more sustainable business more successful. GLOBAL 200 members spanacross the globe and all economic sectors. UNIQUE PLATFORM Access to a sustainable business community and a safe space to exchange ideas and information. VISION: is to create a world where more than nine billion people are all living well and within the boundaries of our planet, by 2050. CEO-LED WBCSD is oriented towards and led by member-company CEOs. MARKET-DRIVEN Put business at the center of sustainable development.
How we do it Innovation We deliver pioneering sustainable business solutions. Collaboration We connect companies, partners and sectors to deliver results that no single company could achieve alone. Valuation Our goal is an economy based on true value, true profits and true costs: ensuring more sustainable companies are more successful.
Representing a combined revenue of more than $8.5 trillion and 19 million employees.
Why are we here?
A complex world 6
Complex Problems 7
Complex changes 8
Time and again companies have failed to adapt to the changing business context 1970s 1980s 1990s 2000s 2010 2011 2012 2013 2014 2015 2016 2017 2018 9
Time and again companies have failed to adapt to the changing business context 10
Business and operating environments are becoming more complex and global in scale Top 5 Global Risks: likelihood 2008 2013 2018 Asset price collapse Severe income disparity Extreme weather events Middle East instability Chronic fiscal imbalances Natural disasters Failed and failing states Rising greenhouse gas emissions Cyberattacks Oil and gas price spike Water supply crises Data fraud or theft Chronic disease, developed world Mismanagement of population ageing Failure of climate-change mitigation and adaptation Economic Environmental Geopolitical Societal Technological Top 5 Global Risks: impact Asset price collapse Major systemic financial failure Weapons of mass destruction Retrenchment from globalization (developed) Water supply crises Extreme weather events Slowing Chinese economy (<6%) Chronic fiscal imbalances Natural disasters Oil and gas price spike Pandemics Diffusion of weapons of mass destruction Failure of climate-change mitigation and adaptation Failure of climate-change mitigation and adaptation Water crises 11
Meanwhile, stakeholder expectations continue to grow related to ESG-related issues Investors Growing interest in a company s ESG performance Customers Demanding more sustainable products and services Employees Want to work for employers that incorporate ESG into their purpose and strategy NGOs Greater scrutiny and targeted campaigns relating to ESG performance Regulators Increasing regulation around ESG issues Communities Increasing pressure from communities that are impacted by corporate activities 12
Breakdown in ESG-related risk management Research published in 2016 by WBCSD revealed companies struggle to identify ESG-related risks in annual risk filings despite identifying them as material in sustainability reports 13
8% of companies were found to have full alignment 14
57% of companies were found to have some alignment 15
35% of companies were found to have no alignment 16
17 www.reportingexchange.com
Coverage 61 countries 1787 Reporting provisions reporting requirements, resources and management resource 70 sectors 270,000 data points 18
Explosion of ESG reporting 74% 182 81% Based on 61 countries in the dataset Sept 2017 ESG reporting requirements have been introduced since 2007 Voluntary reporting frameworks More mandatory reporting than expected 19
Theory of Change 20
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Applying ESG to ERM 22
COSO (Committee of Sponsoring Organisations of the Treadway Commission) Representing more than 700,000 professionals 23
COSO ERM Framework (2017) 24
Applying ERM to ESG-related risks www.coso.org www.wbcsd.org 25
3. Applicable to any risk management framework COSO ERM Framework principles Guidance can be applied to any ERM framework 26
Applying ERM to ESG-related risks COSO ERM Framework principles 27
Eight reasons why the guidance can help your company 1. It s for everyone! 2. A common language for articulating risks 3. Applicable to any risk management framework 4. Enhances company resilience 5. Allows for greater pursuit of opportunity 6. Improves resource deployment 7. Achieves efficiencies of scale and leverages capability 8. Improves disclosure 28
1. It s for everyone! Regardless of 29
2. Provides a common language for articulating risks Risk impact in terms of revenue, cost or EBITDA Integrated thinking Megatrends Scenario Analysis ROI Materiality assessment Risk appetite Natural captial Monte Carlo simulation Impact on company strategy or objectives 30
3. Applicable to any risk management framework 31
4. Enhances company resilience A company s medium and long term viability and resilience will depend on the ability to anticipate and respond to risks that threaten its strategy and business objectives. 32
5. Allows for greater pursuit of opportunity By considering both positive and negative aspects of ESG-related risks, management can identify ESG trends that lead to new business opportunities. Opportunities Sourcing from renewable energy Green bonds Low carbon products Downside protection Contingency planning Flood protection insurance Emissions reduction 33
6. Improves resource deployment Obtaining robust information on ESG-related risks allows management to assess overall resource needs and help optimize resource allocation 34
7. Achieves efficiencies of scale and leverages capabilities Managing the ERM process Maintaining the risk inventory Assessing risk severity Prioritizing risks for the entity Maintaining an overall risk scorecard for monitoring Megatrend analysis Materiality assessment Impact and dependency mapping Social and natural capital valuations Scenario planning for climate risk 35
8. Improves disclosure Improving management s understanding of ESG-related risks can provide the transparency and disclosure investors expect and provide consistency with jurisdictional reporting requirements. Investors Regulators Employees Customers NGOs Communities 36
Applying ERM to ESG-related risks COSO ERM Framework principles 37
1. Establish governance for effective risk management ESG-related responsibilities Integrating ESG at the board level Understanding the ESG issues and risk management processes Alignment with strategic planning Challenge bias against ESG 38
1. Establish governance for effective risk management ESG-related responsibilities Integrating ESG at the board level Understanding the ESG issues and risk management processes Alignment with strategic planning Challenge bias against ESG 39
1. Establish governance for effective risk management ESG-related responsibilities Integrating ESG at the board level Understanding the ERM processes including roles and responsibilities Alignment with strategic planning Challenge bias against ESG 40
1. Establish governance for effective risk management ESG-related responsibilities Integrating ESG at the board level Understanding the ERM processes including roles and responsibilities Alignment with strategic planning Challenging bias against ESG 41
1. Establish governance for effective risk management ESG-related responsibilities Integrating ESG at the board level Understanding the ERM processes including roles and responsibilities Alignment with strategic planning Challenging bias against ESG-related risks 42
2. Understand the business context and strategy ESG impacts and dependencies identified in value creation process Additional inputs to understanding business context and strategy: Megatrend analysis SWOT analysis Impact and dependency mapping Engagement with internal and external stakeholders Materiality assessment 43
2. Understand the business context and strategy ESG impacts and dependencies identified in value creation process Additional inputs to understanding business context and strategy: Megatrend analysis SWOT analysis Impact and dependency mapping Engagement with internal and external stakeholders Materiality assessment 44
3. Identify ESG-related risks Overlaying ESG-knowledge with the business strategy and objectives Include ESG-related risks in the risk inventory 45
3. Identify ESG-related risks Overlaying ESG-knowledge with the business strategy and objectives Include ESG-related risks in the risk inventory 46
4. Assess and prioritize ESG-related risks Assessing risk severity Selecting assessment approaches, metrics, data, parameters and assumptions Risk assessment prioritization criteria beyond impact and likelihood 47
4. Assess and prioritize ESG-related risks Assessing risk severity Selecting assessment approaches, metrics, data, parameters and assumptions Risk assessment prioritization criteria beyond impact and likelihood 48
4. Assess and prioritize ESG-related risks Assessing risk severity Selecting assessment approaches, metrics, data, parameters and assumptions Risk assessment prioritization criteria beyond impact and likelihood 49
5. Respond to ESG-related risks Options for pursuing risks using innovative responses Accept Avoid Pursue Reduce Share 50
6. Review and revise ESG-related risks Reviewing the effectiveness of risk management 51
7. Communicate and report ESG-related risks Leveraging internal and external communication channels 52
Consultation process and next steps February 2018 30 June 2018 October 2018 Preliminary draft guidance released for comment and survey launched at www.coso.org Public consultation period Final Guidance Published www.coso.org www.wbcsd.org 53
Are you prepared for ESG Risks? Come by and play the Risk Management Game in the Markets Place Booth 44 54
Encourage your colleagues to attend our sessions at the following conferences IIA Dubai, May 7 AICPA Las Vegas, June 9 14 WBCSD Singapore, October 22 25 Mid-Atlantic Society for Corporate Governance Philadelphia, May 17 AAA Washington D.C., August 4 8 55
Our contact details Rodney Irwin Managing Director, Redefining Value & Education @RedefiningValue Irwin@wbcsd.org +41 (0) 22 839 31 07 Brendan LeBlanc Partner, EY Climate Change & Sustainability Services @B_LeBlanc_EY Brendan.leblanc@ey.com + 1 (617) 585 1819 56