ESG and Enterprise Risk Management

February 3, 2023   |   Pulkit Saini

Sixty-two percent of directors say ESG issues are a part of the board’s enterprise risk management discussions.

Source: PwC, 2021 Annual Corporate Directors Survey, October 2021

Globally, companies have realised the importance of communicating their sustainable value to stakeholders. This is being addressed at the Board level because it involves a strategy for sustainability.

As ESG becomes a weightier criterion in investment decisions, not adopting and communicating it as a strategy may have negative long-term implications, particularly as new capital and financing will increasingly be tied into ESG compliance. Senior-level management of many companies feels that the board feels it’s unnecessary to get involved in the issue.

When we apply these 7 questions to strategic messaging, ESG and stakeholder communications is clearly a board-level issue:

  1. Is it big for the company? 
    Yes! Messaging and activities surrounding an organisation’s sustainable value can substantially impact shareholding and potential investment.

  2. Is it about the future of the company? 
    By nature, yes. Sustainable business policies and practices ensure continuity. Stakeholders want to know that companies are pursuing sustainable value creation. Investors need reasonable assurance that their investment will appreciate in the short, medium and long term.

  3. Is it core to the mission or purpose? 
    This depends on the organisation typically. The board is the guardian of the mission and has to determine to what extent they will examine strategic and financial decisions in the ‘sustainability’ context.

  4. Is a high-level policy decision needed? 
    For most companies, breaking the status quo means adopting sustainable practices will require a shift in policies and guidelines. For example, the move to ESG reporting is an issue that necessitates board involvement.

  5. Is there a red flag? 
    This question is highly contextual and may consider issues including governance history, political landscape and issues regarding resource availability, to name a few. Some companies must emerge profitably from a period of extraordinary conflict with their most prominent stakeholders.

  6. Is your watchdog paying attention? 
    Undoubtedly in most companies’ instances, the watchdog is watching. Companies in fintech and mining may be subject to additional levels of regulation. Boards must consider this in high level strategy, ensuring that the business acts proactively rather than reactively.

  7. Does the CEO need the board’s support? 
    Yes. Sometimes the management team needs to know that the board has their back. Or the CEO may want help from directors with connections to important stakeholders. When the CEO calls for support, the board should respond with one voice.

Meet the author

Pulkit Saini
Associate – Equity Research

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