COSO ERM FRAMEWORK AND ESG

What are ESG-related risks?

ESG-related risks are the environmental, social and governance-related risks and/or opportunities that may impact an entity.

There is no universal or agreed-upon definition of ESG-related risks, which may also be referred to as sustainability, non-financial or extra-financial risks a each entity will have its own definition based on its unique business model; internal and external environment; product or services mix; mission, vision and core values and more.

Why do environmental, social and governance-related risks matter for organizations?

ESG-related risks are not necessarily new. In particular, corporations, organizations, governments and investors have been considering governance risks for many years, focusing on aspects such as financial accounting and reporting practices, the role of board leadership and composition, anti-bribery and corruption, business ethics, and executive compensation.

However, over the last several decades – and particularly the last 10 years – the prevalence of ESG-related risks has accelerated rapidly. In addition to a clear rise in the number of environmental and social issues that entities now need to consider, the internal oversight, governance and culture for managing these risks also require greater focus.

The evolving global risk landscape Each year, the World Economic Forum’s Global Risks Report surveys business, government, civil society and thought leaders to understand the highest rated risks in terms of impact and likelihood. Over the last decade, these risks have shifted significantly.

What are ESG-related risks?

ESG-related risks are the environmental, social and governance-related risks and/or opportunities that may impact an entity.

There is no universal or agreed-upon definition of ESG-related risks, which may also be referred to as sustainability, non-financial or extra-financial risks a each entity will have its own definition based on its unique business model; internal and external environment; product or services mix; mission, vision and core values and more.

Why do environmental, social and governance-related risks matter for organizations?

ESG-related risks are not necessarily new. In particular, corporations, organizations, governments and investors have been considering governance risks for many years, focusing on aspects such as financial accounting and reporting practices, the role of board leadership and composition, anti-bribery and corruption, business ethics, and executive compensation.

However, over the last several decades – and particularly the last 10 years – the prevalence of ESG-related risks has accelerated rapidly. In addition to a clear rise in the number of environmental and social issues that entities now need to consider, the internal oversight, governance and culture for managing these risks also require greater focus.

The evolving global risk landscape Each year, the World Economic Forum’s Global Risks Report surveys business, government, civil society and thought leaders to understand the highest rated risks in terms of impact and likelihood. Over the last decade, these risks have shifted significantly.

In 2008, only one societal risk, pandemics, was reported in the top five risks in terms of impact. In 2018, four of the top five risks were environmental or societal, including extreme weather events, water crises, natural disasters, and failure of climate change mitigation and adaptation.

The World Economic Forum also highlights the increasing interconnectedness among ESG risks themselves, as well as with risks in other categories – particularly the complex relationship between environmental risks or water crises and social issues such as involuntary migration.

In the business world, this evolving landscape means ESG-related risks that were once considered “black swans” are now far more common – and can manifest more quickly and significantly. A report by the Society for Corporate Governance in the United States found that these issues often, although not always:

? Derive from a risk or impact inherent in the core operations or products;

? Have the potential to meaningfully damage a company’s intangible value, reputation or ability to operate;

? Are accompanied by persistent media interest, organized stakeholders and associated public policy debates that could magnify the impact of a company’s existing position or practice and increase the reputational risk (or opportunity) created by a change in company policy.

#COSO #WBCSD #ESG

John Galarani

Rio de janeiro/Brazil, August 29, 2024.