PODCAST

ESG is key to understanding business risk: expert views from Fordham Business School

15 September 2020 - By Susanne Katus, VP of Brand & Business Development

Understanding business risk requires having sufficient oversight of the Environmental, Social, and Corporate Governance (ESG) issues which could impact your business now and in future. 

You can’t fully understand business risk without understanding the ESG factors that give rise to that risk, and the business leaders of tomorrow are coming to terms with this. They’re doubling down on removing blind spots at C-suite and board level.

We talked to Barbara Porco, Director for the Center of Professional Accounting Practices at Fordham Business School, the first US institution to join Datamaran’s Academic Program

Porco is leading a project called 21st Century Risk, part of an onboarding for over 80 full time MBA students who are using Datamaran to understand business risk in the modern context. 

The topics discussed included:

  • ESG and understanding business risk
  • Materiality accounting and the new dialect of business
  • The inconsistency of ESG ratings
  • How technology enables a better understanding of emerging and external risk
  • A need for data-driven materiality

Removing blind spots & minimizing risk

While business leaders are increasingly waking up to the financial, reputational and legal consequences of not being in control of ESG issues, there remains a clear gap between sustainability professionals who view business risk through an environmental and social lens, and investors who focus solely on the balance sheet

“All elements of ESG reporting are really based on proper risk management. You cannot manage your risk if you don't know what your risk is.” 

Porco argues it’s time to bridge that gap, because ESG issues - and unknown risks - can have a material impact on a business’s value

“There are certain risks you know, and you can manage them relatively well,” Porco says. “And then there are risks you have not properly identified and are not really sure about. But you know they exist, and you can find out more about them. It’s the risks you don’t know about that will be the problem.”

Business leaders can still be accused of being vulnerable to ESG blindspots. You don’t know what you don’t know, and what you don’t know, you can’t prepare for. 

That’s where Datamaran has helped Porco and her students, by harnessing AI technology to bring unknown business risks into the light and remove blindspots at boardroom level: “Datamaran provides us with the information that will inform us about the things we do not know.”

A need for data-driven materiality

A word that comes up frequently in the ESG space, and in conversation with Barbara Porco, is materiality. 

Some people understand the concept of materiality only as it applies to accounting and reporting - that businesses must disclose in their financial reports everything that is material enough to matter.

There is a wider definition of materiality in ESG, however, as an important business process which helps organizations recognize and plan for the risks that are important to them.
How AT&T used AI to deliver a data-driven, defensible materiality assessment

Porco agrees that, if used correctly and consistently and if based on credible data, materiality informs a business’s short, medium, and long-term strategy. And she goes further, by exploring the notion of double materiality

“Double materiality would represent what you think is important from sustainability, as well as what's important for financial reporting”, Porco says. “You're hitting it from both sides. It's a great terminology for us as educators to use. Students seem to grasp it, I think sometimes more than people who are higher-placed in organizations.”

Accounting & ESG: a more robust dialect of business

Porco tells her students at Fordham that to understand business, they have to understand accounting, because “accounting is the language of business.”

Because accounting is the language of business, business risk could only be explained to executives in that language - in black and white on the balance sheet. But if accounting remains the language of business today, there’s now a new dialect.

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The new dialect is sustainability reporting. It’s the new dialect because it helps us communicate in a more robust way, in a more transparent way, not just to students, not just to business leaders, but stakeholders worldwide.


Barbara Porco Director for the Center of Professional Accounting Practices

Across the business world, there is a growing recognition of the links between ESG and long-term financial performance. Any business looking to be successful short - and long-term needs to account for a multitude of emerging and evolving risks, and needs the expertise and technology to interpret those risks

“We're very, very fortunate to have an organization like Datamaran”, Porco says. “That gives us the tools to curate the words of the language.” 

It goes even further than curating the words of a new dialect. It’s about embracing technology to attain clarity and a deeper understanding of what to do about the risks you are seeing.

The inconsistency of ESG ratings

Barbara Porco and a colleague were recently trying to make assessments of different kinds of business risks and quantify them.

“The goal was to try to put information on financial statements and reassess the risks accordingly,” Porco said. “We decided to take a representative sample of the top 100 companies that are ranked for sustainability, and select three different rating agencies. We thought that would have given us a repetition, and from that we would have gathered a strong sample.”

The result? “The overlap was disturbingly inconsistent.”

Rating agencies look at how organizations handle ESG issues, and give them an ESG rating based on their performance. The trouble is that every agency issues ESG ratings based on different criteria.

This isn’t so much a data problem as a data analysis problem. Relying exclusively on human analysts, from different agencies, each with their own inherent biases, is going to deliver inconsistent results.

There’s a need for a more transparent, science-based approach. That’s why Porco supports the use of Datamaran:

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“Datamaran gives you the wealth of information, and in a way that you can decipher what you want to rely upon...when you see patterns of information, for me, that's where you're seeing the wealth of data, the wealth of decision making information that's going to be critical for a business”. 


Barbara Porco Director for the Center of Professional Accounting Practices

Monitoring emerging external risks

As 2020 has shown, organizations now have to contend with external risks that can emerge as if from nowhere and transform the entire business landscape

While the Coronavirus may have brought ESG to front-of-mind in some organizations, educating boards and executives about the consequences of external risks remains an ongoing effort. 

Part of the challenge is the sheer volume of external factors that have the potential to affect a business, and the huge array of media providing us with different, often contradictory, information. As Porco says: “We have so many different impulses that we have to manage on an everyday basis in terms of our news feeds, our social feeds”.

Cutting through the noise to get to the relevant information is key to building a reliable ESG strategy, and something Datamaran has helped Fordham Students achieve. 

“It really neutralizes the noise for them”, Porco says. “It helped them focus on elements of the research that were part of our projects. And I feel like it really helped our students not just understand the information but understand where all the information comes from, and the challenges of being able to collect it all.”

ENDS


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You will learn how to enhance the voice of stakeholders in your assessments, why continuous monitoring is critical to stay on top of emerging risks, how to use technology to implement a more credible and systematic method of conducting reasonable assurance of your ESG data, and the best practices to streamline your materiality process.

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