Growing ESG risks means greater role for risk managers

As ESG gains greater prominence, so awareness of the risks involved and the need to manage and mitigate is also growing. And this will have a major impact on the role of the risk manager in European organisations. As a result, risk managers face the challenge of identifying, evaluating and mitigating the risks. And part of this will be an education process as risk managers look to take a central role in sustainability. The awareness and understanding of sustainability is rapidly evolving and growing, largely driven by stakeholder pressure, from customers, investors, NGOs, regulators and the media, according to Alex Hindson, partner, head of sustainability, Crowe UK and a member of the Institute of Risk Management’s ESG Group. He notes that retail organisations with a direct customer interaction, be it for financial services or consumer goods, are seeing consumers press for greener and more ethical solutions. The greatest regulatory and stock exchange pressure is falling on the largest organisations, particularly in financial services, he explains, while pensions are extremely active as investors in their stewardship and engagement activities, impacting the energy-intensive industries. And non-governmental organisations are increasingly resorting to court cases to apply pressure on large-listed companies and government agencies to drive change. Growing awareness As a result of all this pressure, awareness of ESG risks is growing and must be a key consideration for all companies, according to Valentina Paduano, chief risk and compliance officer, Dedalus Group, and chair of Ferma’s sustainability committee. “However, the impact in terms of the level of analysis required to assess these risks can differ by industry. For example, for the healthcare industry it is perhaps the social aspect that could be more relevant and urgent than the environmental, when compared to other manufacturing sectors,” she says. Paduano explains that Ferma has a sustainability committee of around 20 people, which is made up of representatives from most Ferma membership countries and associations. Within the group there are two sub committees focused on critical raw materials and on insurance-related matters such as the climate protection gap. “As a committee we are focused on anticipating and following regulatory announcements from the European Commission, to better understand the impact on our organisations and, wherever possible, lobby representatives at the European Parliament to stress the importance of adopting a risk-based approach when introducing ESG directives. This has been a good opportunity for our members to engage in direct debate on these issues,” she says. So just what is the key role of the risk manager in ESG and sustainability? Paduano says it is primarily to identify and evaluate ESG risk. “There has been a lengthy debate in the industry about how to integrate ESG risk within traditional ERM frameworks and processes, and at Ferma we have continually stressed the need for this integration because ESG risks are in reality business risks,” she says. She adds: “Risk managers should take the opportunity to raise the topic of sustainability at senior management level. Risk governance models have already been adopted by many organisations across Europe as standard, and now we have a growing opportunity to raise ESG and sustainability at a strategic level within our organisations.” Hindson believes the role of the risk manager on sustainability is the same as on all other areas of risk, “which is to support the risk owners in articulating their appetite for the risk, both in terms of opportunity and threat, and ensuring that the risk controls and processes in place are able to meet these business objectives. The risk function also has a unique role in providing horizon scanning as this area is fast moving and therefore prone to many emerging and transforming risks.” He says risk managers need to think in terms of what threats and opportunities does ESG/sustainability create for the business strategy, business model and the organisation’s brand and reputation. “That implies firstly identifying, analysing and understanding the risk exposures and then defining a risk appetite (or ambition for opportunities), so that these risks can be managed. Once the risk managers have helped the organisation define what it is seeking to do, then they are very well placed to help identify and implement processes and controls to mitigate and manage them.” He notes that right at the end of the process comes reporting, firstly to the management and board, and secondly external disclosures required by regulations or stakeholders. He adds that reporting is a point of external pressure, but should never be the starting point for addressing sustainability. Roles and responsibilities The risk manager’s role is often one of coordinating across all areas of the business, which should make them well suited to taking on a similar role with ESG. Paduano says that in Italy – but also more widely in Europe – there is an important debate happening about where to place the role and responsibility for sustainability within an organisation, and whether the risk manager is the right person to wear both hats. “Within Ferma, we have many examples of where the risk manager’s role has effectively already become the risk and sustainability manager,” she says. “In my previous job, for example, my title was chief risk and sustainability officer, and in my current organisation we are having the discussion about whether sustainability should be placed under my area of responsibility. I think it is feasible, because the competencies and skills required to address ESG matters can be more easily defined as a risk management function than as other business functions.” If the role is not combined, then sustainability managers and risk managers will have to collaborate, Paduano explains, “because all of the organisation’s reporting on sustainability will be driven by risk assessment and the risk-based approach. So that collaboration is fundamental.” She adds: “There is a wider opportunity here for risk managers to improve their role, and to continue to attract more attention from their boards. The role of the risk manager should evolve, and extending to encompass ESG and sustainability is a good opportunity for individuals and the profession.” Challenges As for the main challenges for risk managers in tackling ESG, Paduano believes the key one is in communicating the importance of education in sustainability matters. “Sustainability is a wide topic that can be very technical and requires specific expertise. The challenge for risk managers is to grasp this opportunity to improve their competencies and continue to improve their understanding of these issues. We have to recognise, however, the complexity of ESG risks given their extended value-chain impacts, as well as the need for greater understanding of these risks,” she says. “The market talks a lot about sustainability, but very few people can talk in detail about ESG and sustainability. Risk managers need to become experts in these matters – elevating their understanding by reading white papers, participating in masterclasses, and attending more educational events,” she adds. For Hindson, it largely depends on where their organisations are on their sustainability journey, related to its maturity, operating model and risk insights, and depends on a number of factors: How well developed is the organisation’s understanding of sustainability and the implications of the varying ESG factors on the business? Is there a basic level of understanding at board and senior management level to enable to meaningful conversation? How is the business organised to address the sustainability agenda and is the ownership for sustainability clearly defined or still forming? It is hard to engage management on sustainability risks if the ownership of the risks is still uncertain. Does the organisation want to look at sustainability through a risk management lens, or is this perceived as a compliance or reporting exercise?

Growing ESG risks means greater role for risk managers

Education and collaboration are key

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