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From: Forbes
Edward Segal
Senior Contributor, Leadership Strategy
November 16, 2021

A good way to help prevent crisis situations is to monitor, manage and mitigate the risks that can create a crisis. Unfortunately, managing systemic risks ranked last on a list of 22 metrics in a new survey of where companies concentrate efforts to report their compliance with ESG.

The 2021 ESG & Compliance Survey was conducted by OnePoll for NAVEX Global in September and October 2021. It included responses from 400 managers and senior level executives responsible for regulatory/financial compliance and HR/corporate compliance in the U.S., U.K., France and Germany. They all work at companies with 500 or more employees.

There are disadvantages and drawbacks for companies that do not monitor and report their management of systemic risks.

The Risks Of Not Knowing

Lack Of Awareness

“All elements of ESG reporting are really based on proper risk management,” according to Barbara Porco, director for the Center of Professional Accounting Practices at Fordham Business School. She noted that, “You cannot manage your risk if you don’t know what your risk is. It’s the risks that you don’t know about that will be the problem, and you cannot do that without a data-driven and tech-enabled risk management approach.” 

Damage To Brands

“Classic risk management typically focuses on aspects such as business continuity, currency fluctuations, supply constraints and compliance,” according to Elaine Grunewald, director of the European Sustainable Growth Acquisition Corp.

“Having a broader, 360 [degree] view is vital to earn stakeholder trust—without it, companies risk damage to their brand, their license to operate, or worse yet, in some cases severe fines,” she said. 

Failing To Build A Sustainable Enterprise

Robert Katz is executive vice president, general counsel and chief ethics and compliance officer for Jabil, which provides design, manufacturing, supply chain and product management services.  He advised that, “Understanding, communicating and updating on systemic risk is a key element to building a sustainable enterprise with a rock-solid foundation. 

“If you don’t understand the systemic risks impacting both your business and businesses in general, then you are failing to build a sustainable enterprise,” he cautioned. 

Financial Undervaluation

Rick Perez is the founder and CEO of Avangard Innovative, a waste and recycling optimization company with operations in 11 countries.  He explained that, “…ESG reporting provides a snapshot of the business impact on investors, customers and wider stakeholders. [The] reporting has become one of the top priorities for major public companies as capital markets are measuring the ethical impact of the companies they choose to invest in.

“Companies that do not monitor and report their ESG metrics incur significant risk of financial undervaluation, loss of business and other consequences as investors, consumers and other stakeholders decide to do business elsewhere,” he warned. 

Impact On Stock Performance

Maxim Manturov, the head of investment research at online trading company Freedom Finance Europe, observed that, “Systemic risk management reporting plays a key role in underlining a business’ ESG credentials. [As] eco-friendly initiatives and industry challenges grow and shift at a rapid rate, it’s essential for companies to maintain a finger on the pulse and to adapt accordingly.

“Failure to effectively monitor risk management can lead to companies experiencing an ESG [related controversy] that could severely impact their stock performance,” Manturov counseled.

Need For Standardization

Richard Jefferson is chief commercial officer for developer platform company Beacon Platform. He noted that, “Customers, investors, governments and other stakeholders are now expecting companies to report what they are doing about ESG. What is not standardized, yet, is exactly what needs to be measured and reported. Some aspects, such as carbon footprint should be able to be calculated and independently verified, while other aspects, including employee wellbeing are more descriptive.

“Although calculating can be tricky, especially if that entails looking horizontally across a business, non-reporting is not an option. ESG compliance is certainly a buzzword at the moment, and there will surely be a greater need for standardization,” he predicted.

Advice For Business Leaders

Demand For Data

Karen Alonardo, vice president of ESG solutions at NAVEX Global, said that, “new governing organizations, like the International Sustainability Standards Board, are being formed to help consolidate ESG disclosure as a result of demand for useful, comparable ESG data.

“Amid these changes, ESG factors present financial, operational and reputational risk. To get ahead of coming ESG guidance and reporting standards, organizations must consider ESG reporting as part of their integrated risk management approach now, if they have not already.”

Alonardo warned that, “Given increased stakeholder and regulatory interest, failure to comply with ESG standards will be a major organizational risk in the coming year and beyond. Organizations that do not report on compliance with ESG metrics as it relates to systemic risk management will see investors, customers and other stakeholders voice concerns, by word and by wallet, potentially resulting in a direct hit to business." 

‘Not Just About Protecting Shareholder Interest’

Maeva Charles, vice president of partnership and client solutions for Datamaran, said “risk management needs to take an outside-in and forward-looking perspective. Why? Risk management is not just about protecting shareholder interest; it’s about understanding, anticipating and meeting the needs of society at large."

She noted that, “Most risk management processes have become obsolete and cannot handle the wealth of data continuously being generated. Big data and unstructured data are very powerful when it comes to shaping strategic decision making. But if the risk management process cannot handle the data, its insights will not be extracted, let alone applied.

“That’s why companies depend on technology to enable effective risk management—the sheer volume of available data requires technology,” Charles advised. 

Severe Implications

John Breen, head analyst of global risk for Sibylline, warned that, “U.S. businesses that do not report compliance with clear ESG policies open themselves up to financial and reputational risks. The implications for companies who do not set clear policies and ensure compliance can be severe – a 2019 report from Bank of America showed that ESG-related disputes wiped [more than] $500 billion off the value of large U.S. companies over a five-year period.

“More recently, in the build-up to COP26 we have witnessed greater activism not only among environmental groups directly targeting “climate-damaging” businesses which can lead to property damage and disruption to operations but also in relation to investor activism which can have longer-term implications for a company,” he said. 

Increased Investor Activism

Breen predicted that, “Investor activism will grow on the back of disappointment among environmental groups over the COP26, and corporate decision-makers will face greater scrutiny over their ESG policies.

“As a result, U.S. businesses will need to extend and implement transparent ESG frameworks to mitigate these risks, while undertaking investments into data-driven risk assessment capabilities to show how their respective ESG policies are having a measurable impact,” he concluded.

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