How Your Company Should Govern Environmental Risk

How Your Company Should Govern Environmental Risk

Investors are increasingly concerned about environmental, social and governance issues. These include the areas of human rights, climate change and wa

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Investors are increasingly concerned about environmental, social and governance issues. These include the areas of human rights, climate change and water scarcity. Now more than ever, corporate boards need to know how these issues will affect their current and future business strategies and results.

The impacts from these long-term issues could affect a corporation’s access to materials, human capital and sales. Corporations in every economic sector are affected by these issues, and their impacts are already being felt by large, multinational businesses. Use these recommendations on how your company should govern the spectrum of environmental risks.

Understand how Environmental, Social and Governance Issues Could Affect Your Business

Before any action can be taken, you must consider the variety of ways that environmental, social and governance issues could affect your company. Think about what kinds of risks those problems pose to the way you do business. Consider when those risks could come to fruition. Risks are not independent of each other.

Think about how they interrelate and compound. Know which risks are emerging and which ones are long-term problems that will manifest themselves over decades rather than months or a few years. A clear understanding of time frames and interrelationships helps you plan a better response strategy.

Evaluate How Your Current Processes Allow You to Discover Risks

Review your current process for the identification of environmental, social and governance (ESG) risk factors. Make a list of which of those factors you already track. Your processes need to facilitate systematic identification of risks. If there are risks your company has not been able to identify through the processes already in place, your processes may need correction.

How Boards Can Measure Risks

Many CEOs want to know how boards can measure ESG. The measurement tools vary based on the type of risk. Your board’s decision-making process for identifying and measuring those risks must include a diverse and competent board. Your board may need to make adjustments to insurance, capital expenditures, mergers and acquisitions, development of new product lines and divestiture of assets.

Your measurement plan will also need to take into account consumer trends, fines for violating regulations, extreme weather events, market devaluation, data security breaches, the impact of artificial intelligence on the job market and the impact of emerging technologies on product development and human health.

Use a Variety of Sources

Your business shouldn’t only use one source to identify risks. Make a list of sources you currently use. Find out which sources your corporate peers are using to identify risks. Conduct a survey to determine what your investors think the biggest risks are.

Make sure your board has consulted all possible partners and sources of information about risks that could impact your business. A thorough evaluation of sources should include employee surveys, customer sentiment, shareholder engagement, management involvement and peer sharing.

Beware of Making Assumptions

Every company has a blind spot. Know what yours is. Your corporation may have gotten comfortable and overlooked a key area of risk. Look at different time frames. The risks for a one-year time frame are likely to be different than those in a 20-year time frame.

Think about how accurate your assessment tools are for those longer time periods. If your corporate culture isn’t transparent, now is the time to change direction in the degree of openness.

Integrate Known Risks Into Your Enterprise Risk Management Processes

If your current Enterprise risk management process doesn’t consider environmental, social and governance risks, it needs to be updated. Your management processes need to be agile to recognize emerging issues. It need to be flexible to continuously find the newest risks.

 

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