Future proofing is not about sustainability, it’s about running a good business. It’s becoming impossible to ignore the shifts taking place in the corporate landscape around the world. Ways of conducting business are evolving, as are the wide array of factors that can help or hinder a company’s ongoing performance and success.
“Black swan” events – such as once-in-a-lifetime weather events are more frequent and severe than ever before. As these shocks happen more frequently, the global economy is negatively impacted. As markets values are eroded, the markets will shift to reward the companies who are the most prepared – the companies who consider sustainability-related risks and opportunities from the board all the way through to daily operations.
Unfortunately, decision-making and disclosure practices often overlook crucial risks, opportunities and value drivers associated with these events, and more broadly, across natural, social, human, relationship and intellectual capital. As a result, decision-makers sometimes miss material information that’s essential for defining a robust and resilient corporate strategy. What is the best way for companies to keep up?
First: build a solid foundation of oversight and structure
In any company, the board is responsible for ensuring that strategic direction is aligned with shareholder interest and with existing frameworks like the Sustainable Development Goals (SDGs). Another responsibility is the day-to-day business management that is conducive to long-term success. It’s part of a board’s fiduciary duty to make sure it’s managing risks and opportunities across all areas. But a board cannot reasonably accomplish this if it isn’t addressing expanded impacts, dependencies and risks –like those related to environmental, social and governance (ESG) and sustainability.
Sustainability can no longer be considered in isolation from the rest of the company. It is not a department, report or separate strategy – it should be integrated into board governance and internal decision-making and be the desired result of the corporate strategy.
Governance is evolving fast and investors are demanding more. As such, boards must consider the potential impact of ESG-related risks on the long-term sustainability of their business to mitigate unnecessary exposure while seizing unprecedented opportunities. Sustainability can no longer be considered in isolation from the rest of the company. It is not a department, report or separate strategy – it should be integrated into board governance and internal decision-making and be the desired result of the corporate strategy.
Second: optimize internal decision-making
Ten years ago, the top global risks in terms of impact included only one risk related to ESG factors. But today, ESG risks account for most of the world’s top risks in terms of impact and likelihood. New and emerging ESG risks and opportunities create hidden costs and benefits for global businesses. In order to prepare, businesses need to get serious about using established frameworks to understand their natural, social and human capital impacts and dependencies.
Companies should include the information they uncover with these frameworks in their overall risk and opportunity management strategies. This process helps ensure that companies are protected against a range of risks that may not have been properly accounted for previously. Companies can get started today, by using their existing risk management frameworks. Together, in a historic partnership, the World Business Council for Sustainable Development (WBCSD) and the Committee of Sponsoring Organizations for the Treadway Committee (COSO) issued the first-ever guidance for helping organizations respond to ESG-related risks, ranging from extreme weather events to product safety recalls.
Most of the world’s top companies (about 70% of Fortune 100) already use the original COSO Framework for Enterprise Risk Management – so supplementing it with a framework for understanding and managing ESG risks is an easy step forward. Once companies understand their impacts and dependencies on all forms of capital and integrate this information into internal decision-making processes and risk management frameworks, the next step is disclosing ESG-related risks and strategic approaches to managing them.
Third: give investors decision-useful information they can’t ignore
Investors want to see how companies are resilient against ESG risks. After all, companies who consider ESG often outperform those who do not. For example, Olam, Stora Enso, Unilever, Danone and Phillips have linked ESG performance to loan prices and interest rates, in collaboration with ING, BNP Paribas and others. Aside from lowering their cost of capital, companies who consider ESG risks and opportunities also benefit from better access to financing, customer satisfaction and loyalty and better employee relations.
The sustainability report, in its current form, may not be the most effective vehicle for companies to to communicate their ESG strategy or material risks, impacts and dependences to investors. Investors need consistent, accurate, timely and reliable information and have established channels through which information flows. Companies should focus on reporting what really matters for their key stakeholders – including investors. The Task Force on Climate-related Financial Disclosures (TCFD) Recommendations is a great first step, as their framework help companies focus on and properly disclose climate-related risks.
The support and tools are available to help address and prepare – companies have no excuse not to take advantage of them to future-proof their businesses while safeguarding the future of the economy, society and the environment.
For information beyond climate, tools for moving towards purpose-driven disclosure are available – so companies can focus on sharing what’s material and what’s decision-useful for investors and other key players.
Fourth: take practical steps to move forward
As the world becomes increasingly interconnected, a twenty-four-hour media cycle and increased transparency means companies can no longer solely consider shareholder value and short-termism without consequences from consumers, employees, regulators and the press. Many examples of companies who inappropriately managed their ESG-related risk and opportunities now exist. However, the support and tools are available to help address and prepare – companies have no excuse not to take advantage of them to future-proof their businesses while safeguarding the future of the economy, society and the environment.
Rodney Irwin is the Managing Director of the World Business Council for Sustainable Development (WBCSD) Redefining Value and Education programs. He is also a member of the organization’s Senior Management Team. In this role, Rodney is responsible for overseeing projects designed to help companies measure and manage risk, gain competitive advantage and seize new opportunities by understanding environmental, social and governance (ESG) information. He is the link between WBCSD members and mainstream business standard setters and regulatory bodies and manages the organization’s relationships with key education partners including Yale and Lancaster Universities.
Rodney is a keynote speaker at ImpactDay on May 23rd.