ESG Materiality and Risk Analysis: how AEP engages the Board
The ESG momentum has been growing in the corporate world, with 2020 being the "trifecta effect of ESG" - when the pandemic, climate change, and social unrest proved how quickly events could change the focus and risk for companies. As investors are increasingly scrutinizing companies' risk management approach, corporate executives now recognize that ESG risks should inform their corporate strategy. Engaging them - and the Board - is business-critical to ensure long-term value creation and investors' support.
We asked Melissa Tominack, Corporate Sustainability Manager at American Electric Power (AEP), how she and her team leveraged Datamaran's dynamic, data-driven materiality assessment to get their Board engaged and improve their understanding of the changing ESG risks and opportunities landscape.
Integrating materiality and risk analysis: taking ownership of your story
As Tominack states, 2020 has very much highlighted the opportunities that ESG can bring in terms of value creation, bringing to the surface “a real desire for multifaceted forward-looking, resilient business strategies”. This has led the Board to ask more questions about ESG risks integration, and, consequently, for the risk team to leverage the insights offered by the sustainability team. In the last year, AEP has taken a leap forward in advancing the conversation and gaining engagement with the Board, executives, and other teams such as treasury and risk management.
Tominack: “This year was the first time that our risk team leveraged our ESG materiality assessment within their analysis. We had a lot of conversations, and presented the results of the materiality analysis to them before anyone else, to seek their insights and feedback.This really provided us with a more robust lens on our emerging risk issues, and an opportunity to align the strategic vision and the execution.”
With this interaction, AEP has been able to translate the insights of the materiality process into a concrete action plan, supporting the risk management process as well as informing other forms of disclosure beyond standalone ESG or sustainability reports. This empowers a company to take ownership of their narrative around risk identification and mitigation.
Tominack: “What we are really trying to do is make sure that we are leveraging this information. We're leveraging the results of Datamaran and the emerging issues to really have us tell our story and determine where we can be most valuable and strategically aligned with the company. And especially when we are reporting the results and sharing this with our executive team and our Board of Directors, this gives them comfort in knowing that we're on it”.
A dynamic and data-driven approach ensures a more robust lens on emerging risk
Although a materiality assessment is just a snapshot in time, Tominack emphasized how adopting a dynamic approach to the analysis allows the company to continuously monitor how emerging risks evolve over time. This is particularly relevant when events such as the pandemic hit, radically changing the horizon of external expectations and priorities.
Tominack: “We had planned for long on doing another materiality assessment in 2020. When the pandemic hit, we really questioned whether or not we should conduct a materiality assessment in the middle of so much that was in flux. But then we thought that now was the perfect time, because it truly shows that what we once were reporting on five years ago, or even just a couple years ago may not be the same today, and how one event can change the issues in the focus and the risks impacting a company”.
Tominack: “What Datamaran brings to the table is real time insights that are data-driven and give a global look as well, allowing us to monitor external risks and opportunities and identify emerging trends. All combined, this provides an opportunity for us to ensure that there is consistency in the results and that we have a clear and focused strategy. It's not just one insight: it's the most robust insight that we could possibly have.”
“We've worked together since the pilot of Datamaran: the evolution has just been outstanding, and it is continuing to evolve. Datamaran helps us stay ahead of the game and really find ways to engage with the leadership and our Board.
Improving strategy and Board oversight: how Sustainability has entered the C-suite
As Tominack states, “the integration of material ESG risks and opportunities into a company's strategy is one of the biggest drivers of success. It really helps identify strategic opportunities and business model needs, and helps the company to position itself as agile and competitive.”
Tominack: “Our board is asking about it, they want to know how we are monitoring and managing these risks. We shared the materiality results with the board last year - and during the board meeting last week, it was the governance committee of the board that asked about it. It almost gives them a sense of relief that our team is on this. And it's nice to know that the board supports us and that they're able to kind of get insight into how we are managing these issues”.
Integrating material ESG risks into a company's strategy is one of the biggest drivers of success. It helps identify strategic opportunities and business model needs, and helps the company to position itself as agile and competitive.
Melissa Tominack - Manager, Corporate Sustainability, AEP
Tominack: “We are currently rethinking our business strategy as corporate sustainability, and what our business model is in order for us to be sustainable into the future, because this is just going to continue to grow and evolve. That's one of our major strategic initiatives this year”.
“Having data-driven information, we feel we have the foundation to talk about these issues and, in collaboration with the risk team, to address and mitigate risks and to identify opportunities to integrate in the risk analysis review process. And now, we are looking forward to leverage more insights from Datamaran’s Executive Dashboard”.
Stay on top of regulatory developments: an opportunity for sustainability professionals
Tominack highlights also how the events of last year caused a major shift in investors and regulators' attention to sustainability issues, and how ESG became investor-grade material.
“2020 truly was the trifecta effect of ESG, when environmental issues such as climate change merged with governance issues and social unrest. This activity increased the pressure and scrutiny on companies, their governance processes and their management of these types of risks. This begs the question: how quickly will ESG disclosure be regulated?”.
“ESG is actually part of our risk watch list, and we have highlighted this as an opportunity for us to get ahead of the game because when regulation comes, we want to make sure that we're prepared”.
This really elevates the internal position of sustainability professionals within the company and in their relation to C-suite executives and Board members. “It really emphasizes the importance of transparency, engagement, and integration, and if you think about it, that equals materiality and sustainability departments within companies across the globe,” concludes Tominack. “We are a very important part of AEP's future business strategy. And this is really pushing us to that next level”.
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