How to enhance Board’s oversight on ESG and keep up with market expectations

4 August 2021 - By Nicoletta Ferro, Director of Customer Success.

The past 12 months have catalyzed the global attention on ESG, showing how these issues are an effective component of risk management for Boards, how crucial it is for businesses to monitor emerging risks and opportunities, and how quickly issues can become financially material. However, while Boards of Directors have seen an uptake in their ESG responsibilities, shareholders, regulators, employees and even consumers have been increasingly questioning their capacity to manage and communicate transparently about risks that can affect the financial performance of businesses

What can be done to enhance the capacity of boards to meet these expectations has been one of the topics discussed during our Global C-suite Forum on Digital Transformation and ESG.

During the discussion, thought leaders and ESG professionals from corporations such as American Electric Power (AEP) and representatives of the investor community such as Nasdaq, clearly defined the improvement needed to achieve better board oversight:

  • Improve risk management processes and support them with consistent data
  • Adopt a dynamic approach to external risks monitoring 

Start from integration

The responsibility of overseeing external risks does not solely lie on the shoulders of Boards. Rather, it is the result of a multistage process managed by executive teams, and enabled in different ways across companies. The ultimate goal being to provide board members with good quality data that allows making fact-driven strategic decisions on current and emerging risks.

Byron Loflin - Nasdaq


“Generally, at a high level, the boards have risen in their expectation dramatically in the last two years to understand the issues we're talking about today. And so, if your boards are not already asking for more information on material ESG risks, they're going to be asking for it. So you might as well get ahead of it“. 

Byron Loflin Global Head of Board Engagement, Nasdaq.

For many companies this process is made up of a multiplicity of activities going on simultaneously and most of the time in silos, affecting the ultimate efficiency of the process itself. This calls for a reconfiguration of the risk management process that needs to be brought to a level of integration to better attune to our new and changing reality.

Keep the pace of accelerated change

If there is one lesson we can take from the events of 2020 and 2021, it is that risks from the outside world, such as those tied to public health, climate change or Diversity and Inclusion, are now manifesting themselves in uncoordinated ways and display stronger impacts than before, becoming financially material in the blink of an eye. Yet, companies are still slow in their reactions.

This appears very clearly when you look at data insights from the Global Insights Report - a joint publication by Datamaran and the Conference Board issue last December which considers how some of the largest public companies (S&P 500 and S&P Europe 350) and their Boards reacted to the events of 2020 in their corporate reports. As an example, public health risks were absent from most companies’ risk disclosures in financial reports until the risk materialized with the emergence of COVID-19 pandemic.

Percentage of companies mentioning public health risks in their financial disclosure
The impact of the pandemic (as well as other external risks) on business had, however, a silver lining, pushing ESG at the top of C-suite and Board members’ agenda, and affirming the need for senior leaders to take ownership of those risks, highlighting the need for companies to prepare for other emerging risks.
The key differentiator, here, lies in the use of technology and the adoption of a data-driven approach, which ensures a dynamic view of how emerging issues evolve over time, taking better decisions that are supported by data instead of subjective judgments.

Lisa Groff - AEP


“In the enterprise risk community, we are used to talking about black swans - these unpredictable events, and unintended consequences. But there's a new theory out there around ‘grey rhinos’, where you have a number of things that are charging right at you, but you have bias against them and so you may not choose to mitigate them. I tell the board this about climate change as well as ESG: these are your grey rhinos, they have been coming at us all this time”.

Lisa Groff VP and Chief Risk Officer, American Electric Power (AEP).

Mastering the data factor: a leap forward in Board oversight

Identifying and monitoring those “grey rhynos”, which are likely to be ESG issues, is not possible without a solid process that would ensure full oversight of external risks and limit a company’s exposure to ESG blindspots. But to do so, board members should trust the information they receive. 

This is why it’s essential that information on material ESG risks are rigorous and supported by traceable data, making sense of the multitude of information out there. As AEP’s Sandy Nessing puts it, “what the Board needs is not only numbers, but the proof behind the numbers”.

Sandy Nessing - Managing Director, Corporate Sustainability, American Electric Power


‘It's more credible when you come to the table with data to support what you're saying and what you're seeing. I can say, for example, I see human rights as an emerging issue, which is why our materiality assessment tells me that that's an emerging issue. But how do I go back to the company and say: “This is an emerging issue, and here's why”? I need some information to show that. This is why we use Datamaran, so that we can constantly be monitoring those risks”.

Sandy Nessing Managing Director, Corporate Sustainability, AEP.

Robust data is important not just for identifying emerging issues, but also to determine what are the key indicators that show how a risk is evolving, reinforces Lisa Groff, VP and Chief Risk Officer at AEP. This is where the challenge starts. “You have to narrow those items to the key risk indicators and then measure them, to be able to tell when the risk velocity is increasing, and what’s the probability of something actually occurring. It might happen or not, but at least you get the sense of the impact”. 

So here is where senior leaders find themselves at a crossroads: to ensure a robust and credible process that guarantees the full integration of ESG within business strategies, it is critical to adopt a data-driven approach, backed by technology. Such an approach enables companies to proactively identify and monitor material and emerging risks, making informed decisions and advancing Board oversight. The alternative is to remain anchored to traditional approaches, not being able to identify dormant risks before they become major issues and, ultimately, get left behind.


Global Insights Report: The Three Big Wake-Up Calls For Boards

The events of 2020 brought risks related to public health, climate change, and diversity, equity, and inclusion to the forefront of public consciousness. Yet, too many businesses are failing to incorporate external and ESG risks into their long-term strategies and to think about business model innovations to reorient towards long-term value creation.

Published jointly by Datamaran and The Conference Board, this Global Insights Report examines how some of the largest public companies reacted to the events of 2020 in their corporate reporting. It considers how senior executives and Boards can apply this knowledge in addressing other systemic and external risks.

Get your complimentary copy now and learn how to use real-time data to monitor the external risks landscape and stay on top of trends.

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