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Strategy DFIN

4 Steps for Navigating ESG Risks


Sponsored by DFIN

Attention to corporate ESG began primarily as a communication effort; however, new owners of this evolving initiative may be individuals in finance, investor relations, compliance, audit and risk management.

©rudall30/iStock/Getty Images Plus

Understanding the Disclosure and Reporting Landscape  

The consideration of corporate Environmental, Social and Governance (ESG) strategies and performance is fast becoming a fundamental part of investment analysis, requiring a disciplined approach to fully integrate into the investment management process.

In a recent study by the CFA institute, the drivers of ESG integration were identified to include global demand from institutional investors as a method of evaluating risk, as well as to uncover investment opportunities. Investors who spot companies looking to improve their ESG profiles, in advance of the broader markets, may be rewarded.

As defined by the International Integrated Reporting Framework (IIFR), today’s boards, c-suites and management are challenged to identify material ESG risks and opportunities across all forms of capital, including financial, human, social and relationship, environmental, manufactured and intellectual.

A New Focus for C-Suite and Boards 

As ESG issues move into mainstream investing, your chief financial officer, chief accounting officer, chief risk officer, controller, investor relations officer and other c-suite executives, should seriously consider embracing ESG strategies and performance as an important operating set of material factors used to better manage your risk, corporate strategy-setting and long-term value creation.  

At the top, company boards and senior management are in different stages of understanding the impact of ESG/sustainability forces on investors and their own organization’s response. Accordingly, DFIN, in partnership with the G&A Institute, developed a customized, four step guide designed to aid on your ESG and sustainability journey, by providing a clear view of the entire ESG risks and opportunities landscape.

ESG Risks and Opportunities: Understanding the ESG Landscape 

DFIN’s recent white paper outlines four crucial steps to measure, manage and communicate ESG risk and long-term business strategy effectively:

1. Navigating ESG issues — performing an ESG materiality assessment

2. Building a map — identifying available information and internal subject owners for developing decision-useful disclosures

3. Following the ESG disclosure path — using company-specific KPIs to articulate ESG strategy

4. Reaching your ESG goals — effectively communicating your ESG risks and long-term business strategy

Navigating ESG Issues — Performing an ESG Materiality Assessment 

Both companies and investors are challenged with the variable quality and utility of ESG disclosure, data and third-party rankings. Companies are encouraged to review their ESG third-party rankings and scores, and focus on building creditability with key stakeholders. During this step your company must identify the current markets’ understanding of your ESG communications, or lack thereof. Begin to do a thorough gap analysis of company-defined key performance indicators (KPIs).

Once these KPIs are in place, it is easier to monitor ESG risks over time through an internal dashboard.

Building a Map –Developing Decision-useful Disclosures 

When ESG material facts are measured and managed, corporate sustainability, corporate responsibility or ESG-related disclosures can become a platform for your management team to talk about other facets of a company’s story that were historically overlooked. Boards and c-suites are now informed with clearly-defined company-specific material ESG KPIs, which may be honed for corporate strategy, management goals, addressing short-term risks and leveraging long-term opportunities.
  • ESG ratings and rankings firms use different models to gather information and score your company. Analyzing investor ESG data providers’ company profiles created by MSCI, Sustainalytics, Bloomberg, Thomson Reuters and ISS E&S scores, will help you understand the ESG data points used to arrive at their weighting and scorings.
  • Benchmarking newly-defined company material issues against industry and investment peers may uncover how the board, c-suite and management utilize ESG for qualitative and quantitative analysis, building time-bound goals and alignment with long-term business strategy.

Following the ESG Disclosure Path – Articulating ESG Strategy

By using ESG not just to avoid risk, but to gauge and identify future opportunities and long-term value creation, it has the potential of paramount importance for institutional investors. There is also growing consensus that understanding ESG is critical to how companies run their businesses.

  • The exercise of mapping available information, programs, initiatives and data for new and developing ESG disclosures presents the opportunity for the issuer to frame the ESG information for different stakeholders. Understanding the emerging global standards and reporting frameworks — including GRI, TCFD, SASB and CDP — will help deliver decision-useful data.  
  • Ensuring the board charter includes ESG governance and creating a dedicated subcommittee of the board that evaluates various ESG-related risks is critical for achieving your ESG strategy and business objectives. Moreover, the Committee of Sponsoring Organizations of the Treadway Commission (COSO) ERM framework states that the board’s role is to “provide oversight of the company’s strategy and carry out governance responsibilities to support management in achieving its strategy and business objectives.”

Reaching Your ESG Goals – Communicating Risks and Long-term Business Strategy

One of the most valuable things companies can do is to ensure their formal reporting and other disclosures are meeting investors’ and other stakeholders’ informational needs. Companies should fully articulate their long-term strategy; this should include how their ESG goals are informed by the company’s purpose and culture, and the policies and business practices that are aligned with strategic objectives and long-term value creation.

Attention to corporate ESG began primarily as a communication effort; however, new owners of this evolving initiative may be individuals in finance, investor relations, compliance, audit and risk management. While strong communication is still critical, the information being communicated must be broadened to encompass a detailed and user-friendly discussion of both risk and opportunity.

A recent report from International Integrated Reporting Council (IIRC) identified clear signs that Fortune 500 companies’ ESG reporting is evolving and improving. Moreover, leading companies are using industry materiality assessments, as well as emerging ERM and ESG standards and frameworks, to generate decision-useful information.

To learn more, click here to access the full research paper, ESG Risk and Opportunities: Understanding the ESG Landscape. Also, register for our upcoming webinar on May 2 at 2:00PM ET.