What are the best practices for integrating ESG factors into risk management?

A materiality assessment can be performed based on the guidance outlined in one of the globally recognized voluntary ESG frameworks, such as SASB or GRI. Companies can also develop their own materiality assessment approach or use a hybrid method. It’s important to remember that the world is transitioning to the regulatory ESG disclosure frameworks that will impose their own requirements on performing a materiality assessment. The EU’s ESRS draft exposures requires companies to perform a double materiality assessment to evaluate the impact “inside out” and “outside in”. The SEC Climate Disclosure proposal based it’s materiality requirements off the accounting threshold of 1%.

[]Define the materiality factor for “E” and “S” for your line of business [] Review “G” factor based on existing practice, it’s unlikely anything is new unmanaged risk factor in this bucket []Derive ESG scoring methodology ( combining external and in-house ) []Map out financial exposure [] Overlay PD for specific risk factors e.g Climate, Biodiversity []Set Risk Appetite based on strategy [] Start monitoring

It is helpful to examine how ESG risk affects various types of "traditional risks", such as operational risk, credit risk etc. This is not only because risk managers are more familiar with these traditional risk, but rather that ESG risk TRANSMITS through these various type of risk. That's why we need to understanding these transmission channels.

Even for organizations who find SASB and GRI complex, can start small by focusing on more manageable process. Identify key stakeholders; identify ESG issues most material to your organization; consider regulatory guidelines and prevailing industry standards for identified risks, if available; establish effective data collection and management; simplify reporting templates; set realistic goals; learn and adapt. Seek guidance from external experts and consultants if required.

ESG should be treated as an integral part of a company’s enterprise risk management program, which in turn must be aligned with a corporate strategy. To integrate ESG into risk management practices, start with creating a dedicated risk category in the corporate risk inventory. You can either create a standalone level 1 risk category to house all ESG risks or a level 2 subcategory under the existing risk category, such as operational. This is known as a centralized approach. Alternatively, companies can use a decentralized approach by placing identified ESG risks under the existing risk categories without necessarily creating a dedicated ESG category.

Building strong baselines for embedding ESG into your risk culture entails multifaceted approach. Begins with senior leadership's commitment; have governance structure integrated into risk management framework; next would be capacity building and defining KPIs; robust data analysis, feedback loops, cross functional collaborations shall support required continuous improvement.

Embedding ESG into the risk culture of an organisation is no different than including any aspect of business success in the risk management ecosystem of the company. It is critical to treat ESG factors as integral to the success of the business as are other factors such as say, sales, customer retention, vendor satisfaction, etc. It's therefore, a change in thought process that is needed, first of all.

Through Disclosures and Transparency. A company's ESG performance may be monitored, reported on, and targets for improvement can be defined through ESG reporting. This can assist businesses in identifying areas where mistakes are likely to occur and show that they are dedicated to addressing social and governance concerns and implementing ethical business practices. We will also need to normalise and create a culture where it is ok to let stakeholders know that a target is not met, why was it not met and how to mitigate it.

Disclosures and transparency not only help organizations in their journey of Sustainability and ESG resilience but also will contribute to getting recognition from its stakeholders and provide competitive advantages. It is thus important to identify, develop and improve on your key ESG metrics. These data should not only serve the reporting purposed but also provide strategic insights.

Reviewing and updating your ESG strategy is crucial for staying relevant, responsive, and competitive in a dynamic business environment. Remaining aligned with emerging trends, new regulations and evolving stakeholder concerns, allow your organization to stay ahead of potential risks and opportunities. Optimizing on resource allocation, aligning with stakeholders' expectations at all times, exploring innovation and capitalizing on opportunities and adapting long term sustainability strategies are critical.

Collaborating and learning from others helps in leveraging collective knowledge and expertise to drive positive change, accelerate progress and even reduce costs. Collaborations help in adopting best practices, provide accelerated learning curve, enhanced innovation, generate scaling impact and even foster shared responsibilities to pool resources, expertise, and efforts toward common goals.

An example of the impact such collaborations can have on the effectiveness of ESG integration is seen many times in terms of many firms' changed thought process behind executing an ESG strategy. From mere exclusion of negative impact decisions to actual integration of positive impact ESG practices is not something that comes naturally to many firms. It often needs a deeper look at peers and even competitors to realise how deeply can a firm approach an ESG strategy.