Sustainability Risk Management (SRM) is the process of identifying, measuring, mitigating, and reporting on risks related with Environmental, Social and Governance (ESG) factors that can affect the long-term success of an organization. This includes blending sustainability considerations into the organization’s overall Enterprise Risk Management (ERM) framework. The goal is to address potential risks and capitalize on opportunities related to the sustainability issue.
The sources of SRM issues include climate change, labour practices, regulatory governance changes, reputational risks, resource scarcity and related supply chain disruptions, as well as stakeholder expectations. These risks can have financial, legal, operational and reputational consequences for organizations.
At the Intersection of ESG and ERM
Given the rise of ESG and ERM on the corporate agenda, organizing sustainability risk management practices within companies is becoming increasingly important. Leaders are being tasked with strengthening SRM in their business landscapes as a strategic priority that requires dedicated organizational structures and proactive engagement from executives. While many companies have traditionally focused on SRM as a part of investor relations, corporate social responsibility, or public relations, there is a shift to treating SRM as a material business issue. PwC. ESG in the Boardroom: What Directors Need to Know (2020)
As Sustainability Risk Management (SRM) becomes more of an enterprise risk management, business strategy, and operational imperative, leaders must pave the way to set up an SRM framework that is right for their organization.
To establish successful SRM programs, companies need to make key decisions regarding the scope of their sustainability organizations and the issues they will address. This involves determining which sustainability topics should be the responsibility of the sustainability organization and which should be handled by other parts of the business. Companies should identify the sustainability topics that are most important to their business and prioritize them accordingly. A modular organizational design, rather than a centralized structure, is often more effective in addressing emerging sustainability topics and allows for greater agility.
The central SRM team plays a crucial role in coordinating sustainability efforts across the organization. While it does not need to be large, it should be empowered with decision-making authority and hold others accountable. The central team sets targets and tracks progress, while individual business units develop initiatives and plans to achieve those targets. It is important to strike a balance between central decision-making and assigning decision rights to leaders or teams closely associated with specific functions.
Designing Effective SRM Organization Models for Strategic Advantage
When designing a sustainability organization, there is no universal approach. Companies should choose a structure that aligns with their sustainability agenda and fits well within the overall organizational setup. Three effective models were researched and found to be useful.
a large central team with few business-unit resources
a lean central team with decision rights and many business-unit resources
a central team that deploys agile teams to business units
Each model has its advantages and should be chosen based on the company's unique circumstances and goals. McKinsey. Organizing for Sustainability Success: Where, and How, Leaders Can Start (2021)
In addition to reporting lines, companies should prioritize the design of processes and governance that account for sustainability's complexity and dynamic nature. Decision-making processes should be robust, clearly defining when issues should be escalated to the central sustainability team. Regular discussions among stakeholders and fast decision cycles are important to address cross-functional or high-level topics efficiently. If the central team cannot resolve high-priority issues, they can be escalated to the executive team or a C-suite sustainability council. EY. Four Opportunities for Enhancing ESG Oversight (2021)
Outlook for 2024 and Beyond
In 2015, the United Nations Member States adopted the 2030 Agenda for Sustainable Development. This provides a shared blueprint for the triple bottom—people, planet, and prosperity. At its core are the 17 Sustainable Development Goals (SDGs), which are an urgent call for action for all countries in a global partnership. What are the commercial applications? Stakeholders will increasingly be looking for companies to promote prosperity while protecting people and our planet. In other words, for companies to determine how to align business goals with strategies that improve health and education, reduce inequality, and boost economic growth—all while tackling climate change and working to preserve our oceans and forests. Those companies that build strategic partnerships, leverage emerging technology, and foster a culture of innovation will be most successful. Deloitte. Sustainability Risk Management: Powering Performance for Responsible Growth (2019)
Figure 1: In 2015, the United Nations Member States adopted the 2030 Agenda for Sustainable Development. At its core are the 17 Sustainable Development Goals (SDGs).
Forward-looking leaders will navigate to ensure they future-proof their SRM framework by aligning with the SDGs to the extent possible for their organization. In this way, when regulators and policymakers come calling, rather than being sidelined, they can engage in productive dialogue. By appropriately managing their SRM frameworks with an expanded stakeholder map, organizations can preemptively address concerns raised by activist shareholders, social media influencers, NGOs, and other groups. The resources saved by this proactive approach can be better deployed to more profitable activities. CPA Canada. Overseeing Environmental, Social, and Governance (ESG) Matters: A Framework for Boards of Directors (2021)
Forward-looking leaders will navigate to ensure they future-proof their Sustainability Risk Management framework by aligning with the Sustainable Development Goals to the extent possible for their organization.
Concluding Thoughts
Overall, building a successful SRM program requires a strategic approach, clear prioritization of sustainability topics, empowered central teams, and well-designed processes and governance. Organizations that embed sustainability into their corporate strategy can shape their portfolio to reflect an integrated approach. By effectively managing sustainability risks, organizations can enhance their resilience, identify new business opportunities, improve their reputation, and comply with evolving regulations. The results can attract investors and customers who value sustainability and contribute to long-term value creation for both the organization and society at large.
The discussion on SRM is just getting started. I would appreciate hearing your comments on this post. If you wish, please contact me directly. Your feedback may influence the content of my next blog.
References
Thanks to the Institute of Corporate Directors (ICD) Board Info Service for their research and providing relevant sources. Some of these sources are embedded as links above.
The photo for this blog was created by MS Bing Image Creator powered by DALL·E. Prompt Engineering provided by Ryan Massey.
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