3 ways corporate leaders take control of emerging and ESG risk
By Susanne Katus, VP of Brand & Business Development
It’s fair to say 2020 gave us more to think about than most years. In fact, it proved to be a tipping point for many businesses, with boards of directors and senior leaders forced to rethink their risk management and governance practices. External and ESG risk management and disclosure are now an undisputed priority for CEOs, CFOs and boards. The global pandemic, unprecedented social upheaval and huge economic challenges we still face prove that.
Senior leaders now need to go from rethinking to equipping their companies with the expertise and resources necessary to be successful. Boards are “recognising they need to take these kinds of emerging or systematic risks more seriously, and then looking at their management team and how that’s being implemented,” Elaine Dorward-King explained in last month’s live event on the three big wake-up calls for boards from 2020.
Together with Paul Washington (Executive Director, ESG Center at The Conference Board), Stephen P. Gottesfeld (Executive Vice President and Chief Sustainability & External Affairs Officer at Newmont Corporation), and Byron Loflin (Global Head of Board Engagement at Nasdaq), the discussion offered practical insights for companies looking to take better control of external and ESG risks in 2021, notably social injustice, climate change and public health.
This coincided with the launch of our exclusive Global Insights Report, published jointly by Datamaran and The Conference Board, which considers whether S&P 500 and European 350 companies are adequately integrating these risks into their core business strategy. It offers advice for senior leaders on how to better address them moving forward in light of our transformed reality where materiality is dynamic, ESG reporting requirements are on the rise and investors look more closely for double standards.
Ultimately, it comes down to trust; trust in your company’s ability to ensure long-term success. That starts with having the infrastructure in place to identify, understand, prioritize and systematically report on these business-critical risks and opportunities. Let’s unpack this.
Why now? A moment of truth for ESG.
In recent years, companies’ focus on environmental and social issues has been “driven by calm hydraulic forces,” explained Washington during our event. “But 2020 has been a watershed moment. These long term hydraulic forces have suddenly met the accelerant of the pandemic, the connection between the social impact of the pandemic and the diversity aspect of disadvantaged communities being hurt disproportionately, and obviously, the racial unrest not only in the US, but in many places around the world. This has led to a greater focus by investors and by companies on these issues.”
This observation is echoed in our Global Insights Report, which found that nearly all European companies, and about two thirds of US companies, include diversity, equity and inclusion (DE&I) information in their financial reports. In light of recent events across the world, this is likely to increase significantly - particularly in the US, with the SEC expected to demand more robust disclosure on topics such as pay equity, gender, race and ethnicity.
Similarly, 90% of European companies and 70% of US companies include climate risk in their financial disclosures. Yet, despite the increase in the mentions, the majority of this disclosure lacks specificity, showing that companies are still not focusing on the specific actions they’re taking in relation to managing systemic risk. An example in this sense is offered by disclosure on climate change risks - see the graph below.
As we’ve seen with both DE&I and climate change, the increase in disclosure is largely a reaction to investor demands or catastrophic events. For instance, data show that, while there has long been a lack of disclosure worldwide on public health risks, we’re now seeing a significant rise in mentions following the onset of the pandemic. This is a symptom of the fact that, so far, companies’ approach to risk management on external and ESG risks has been reactive. An approach of this type, in a moment when stakeholders - investors and regulators in particular - are watching for double standards on ESG and demanding senior leaders to be authentic in their commitments, doesn’t cut it anymore.
Achieving a proactive approach: 3 priorities
So what are corporate leaders to do? As materiality becomes more dynamic and new ESG reporting requirements are introduced, corporate leaders can seize the moment and help to set the industry standards that investors and regulators will subsequently support. This starts by focusing on 3 priorities: expanding the use of technology and real-time data, advancing Board duties and elevating the role of the CFO.
1. Technology and real-time data - Newmont Corporation gains ground
While companies often set long term goals on ESG issues, the world is moving a lot faster. 2020 proved that what’s material to your company can change very dramatically, with new risks emerging rapidly. As an example, take a look at the graph below which shows how companies responded to public health risks in their financial disclosures. Now more than ever, companies need to keep their finger on the pulse through dynamic materiality decisions that cascade through to their financial reporting.
“The COVID-19 crisis has tested much of what we do, particularly the impact that we have on society. That’s what accelerated what happened post George Floyd. The accuracy of information is something that’s of great concern to all of us.”
Byron Loflin - Nasdaq
Newmont Corporation is adjusting to accelerating stakeholder interest by “monitoring global momentum, strengthening our internal collaboration across our financial and non-financial risk and reporting teams, and laying the groundwork for a more integrated approach to financial sustainability risk and reporting,” said Gottesfeld. These days, Gottesfeld explains, companies are expected to have a purpose beyond the balance sheet.
Stakeholders increasingly want to understand companies’ ESG impacts, and with this comes a demand for robust data on external and emerging risks. “We are focused on tracking the dynamic nature of these risks, and watching how they can move quickly to something that is financially material and essential to our investors,” said Gottesfeld. This also involves ensuring greater accuracy, credibility and timeliness of the data, and the need for technology to support these processes.
“Datamaran has helped us to cast a wider net in how we're capturing potentially material issues and societal signals that can gain momentum quickly. It helps us to evaluate external issues and trends in a way that reduces the potential for unconscious bias and further ensure that no materiality issue has been this characterized or overlooked in our mapping or this process,” Gottesfeld explained.
By determining what is material with the support of patented technology, Newmont can manage emerging and ESG risks robustly, direct resources and prepare strategies for the longer run, ensure investors and stakeholders have the information they need, and respond quickly to regulatory and reporting changes. Ultimately, this helps to improve internal processes across ESG, finance and risk teams, as well as engagement with the Board as they demand more information from management.
2. Advancing Board expertise
While maintaining oversight, Newmont’s Board assigns key ESG risk topics to four specific committees, which provide quarterly reports. Where certain topics require involvement from several different committees, companies need to be clear over which committees have which responsibilities, and committees need to pull together in the direction of the overall human capital and business strategy.
“Boards are recognising they need to take emerging or systematic risks more seriously, and then looking at their management team and how that’s being implemented."
Elaine Dorward-King - Non-Executive Director
That’s why we’re seeing policymakers introducing new corporate governance requirements. For instance, in December 2020, the European Parliament adopted the text of the new Sustainable Corporate Governance which "calls on the Commission to present a legislative proposal to ensure that directors [...] have the legal duty to define, disclose and monitor a corporate sustainability strategy".
With these changing expectations for the Board come higher standards for corporate executives. Recent research shows that US corporate Boards in particular suffer from inadequate ESG risk expertise. Filling this gap depends on an ability to identify, understand and prioritize material ESG risks and opportunities in a dynamic and data-driven way. From there, boards can better respond to the changing governance requirements, as well as ask more useful questions to the executive management team.
Dorward-King is increasingly seeing boards tie the CEO’s and executive team’s compensation to the delivery of key social and environmental targets, including DE&I, which “makes those tangible.” This reinforces the fact that there are financial risks and opportunities tied to these issues, that ESG is tied closely to reputation and financial risk. Of the four large, publicly listed companies of which Dorward-King is a part, two have set up committees in the last year to “take a deeper dive across some of these issues.”
As such, as companies take a wider perspective of business risks and opportunities and better integrate ESG factors into their governance processes, financial disclosures will evolve. The graph below illustrates room for improvement when it comes to DE&I reporting by US companies in particular.
Loflin is also seeing a global alignment in the way boards are looking to capitalize on the shift in society, and use it as a catalyst to innovation. In Europe, the United States and Australia – which is increasingly concerned about the environment due to the recent forest fires around Sydney – “this is a common global concern that is coming together and I hope it’s a trend that promotes a renewed form of capitalism and promotion of finding innovative solutions to ESG issues.”
A critical step towards promoting innovative solutions and mitigating risk is reporting. That's why NASDAQ recently made a proposal for a new disclosure listing rule on board diversity. Loflin pointed to how the COVID-19 crisis has “tested much of what we do and what we’re talking about, and particularly the impact that we’re having on society. That’s what accelerated what happened post George Floyd. The accuracy of information is something that’s of great concern to all of us.”
Created through dialogue with senior influencers from both the investor community and the board, the disclosure rule would let investors know who’s guiding their companies during the long term. It reinforces how disclosure is a reflection of a company’s culture, governance processes and risk management approach, and why now is the time for companies to examine whether their financial disclosures adequately acknowledge ESG risks and opportunities.
3. Elevating the role of the CFO
Newmont’s move towards a more dynamic, data-driven and integrated approach to risk management and materiality is not an isolated one, especially as the policy landscape evolves. More ESG reporting requirements are taking shape that demand greater involvement from the CFO, in particular.
We’ve seen the SEC ruling on increased human capital management disclosures, the IFRS working towards the creation of a new Sustainability Standards Board and the EU updating the Non-financial Reporting Directive.
“Finance needs to learn to speak sustainability and sustainability is learning to speak finance. If you don't have your CFO on board on any of this, you're in serious trouble."
Paul Washington - The Conference Board
What these market developments mean is that the role of the CFO has changed. No longer preoccupied with penny-pinching, CFOs are increasingly setting business strategy and direction. This includes bringing sustainability into strategic planning and budgeting, considering the risks and opportunities. CFOs also play a critical role in sustainability disclosure, increasingly factoring sustainability measures into M&A decisions so stakeholders know they’re buying into reputable companies. “If you don't have your CFO on board on any of this, you're in serious trouble,” said Washington. “Finance needs to learn to speak sustainability and sustainability is learning to speak finance.”
An unmissable opportunity
Any new year is an opportunity to reflect, reassess and restart, but this year more than any other presents huge opportunities for companies worldwide. With global events as the catalyst, corporate leaders are talking about their human capital and business resiliency more than ever before. Now is the time to back that up with credible reporting, risk management and Board oversight processes.
Our Global Insights Report shows how companies are integrating these and other risks into their business strategies, revealing what’s ahead and how you can prepare for it by achieving a more dynamic, data-driven and integrated approach to materiality and risk analysis.
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