1. Embracing an expanded role for risk management
Organizations often need to manage ESG matters across functions, and it is no different with related risk management efforts. Enterprise risk functions will need to work together with the chief sustainability officer, chief financial officer, controllership and other leadership to help manage climate-related risk. Existing risk management methodologies can be leveraged for climate risk assessments and risk governance procedures. This also means incorporating ESG regulatory risk monitoring into existing enterprise risk management programs if risks reach a certain threshold.
While this will expand the role and scope of risk functions, risk professionals may want to use this opportunity to demonstrate how they can add value to their organization by supporting the additional focus and rigor for ESG governance and controls. Forward-looking enterprise risk management teams can also view this as a way to help their organizations unlock the strategic value of ESG by delivering proactive insights that help manage compliance risks and achieve ESG goals and targets.
2. Bolstering internal controls surrounding ESG metrics
One of the first things corporate risk professionals will need to do is to understand the impact the proposed SEC disclosure rules will have on their organization. For example, the proposed rules require companies to report on greenhouse gas emissions including Scope 1, Scope 2, and Scope 3,1 if material. Under the rules, companies will also need to disclose the financial impacts of severe weather events and other natural conditions and transition activities.
Risk professionals will need to collaborate with the sustainability team to perform a careful review of ESG metrics they have been reporting to understand the data, supporting documents and controls underpinning the calculations that will impact filing statements.
As a next step, they should perform a risk assessment of the ESG disclosures already in public domain, review them for completeness and accuracy and determine whether they may need to be adjusted based on the SEC requirements. Risk professionals will also need to assess whether the selected ESG metrics are relevant to the organization’s sustainability narrative and sector issues. A company that manufacturers car batteries, for example, would have different key ESG metrics than a large box retailer that is more concerned about emissions throughout its supply chain.
Looking ahead, organizations will also need to introduce new controls or revamp existing controls focused on emissions and climate change disclosures and other emerging ESG issues such as human capital. Teams experienced in implementing internal control over financial reporting for Sarbanes-Oxley are well-equipped to support their organizations with maturing the internal controls over ESG reporting.
3. Improving governance related to ESG strategy
Risk professionals will also need to advise the C-suite and other key executives on the type of governance structures and processes required to provide sufficient oversight and accountability for ESG strategy and execution. This includes the data collection, collation and calculation processes required to support metrics reporting.
A critical first step will be to engage with other corporate functions as they review the climate-related disclosures that will be included in the financial statements. Risk functions should conduct internal and external benchmarking to understand governance practices within and outside the company and gauge their effectiveness to meet the needs of future reporting. They should also design an ESG audit program for emissions reporting and perform controls testing to monitor and improve internal controls.
In addition, risk functions should advocate and participate in training for employees who will be involved in ESG reporting, especially those on the finance and sustainability teams. Professionals in finance and risk management roles need to be aware of how to interpret environmental data, while sustainability team members will need to understand how regulators might review emissions data.
Organizations should also consider the level of involvement of the board and key leadership, including evaluating the board oversight structure and subject-matter expertise, to establish strong governance over ESG and set the tone at the top for long-term success.
Establishing consistent and rigorous processes for risk management, controls and governance around sustainability reporting and disclosures will provide greater confidence to investors and organizations that want to know how a company is positioned to address the risk of severe climate events. Ultimately, this will help companies better mitigate any long-term impacts from climate change and other related events. And as more companies integrate ESG principles into their core business strategy and governance, they will not only be creating long-term financial value for all their stakeholders, but also taking a major step forward in helping to build a world that embraces more sustainable business practices.
