Protiviti, Invesco, Centene Corporation and Temple University Leaders Weigh in on ESG Risk, What It Means and How You Can Stay Ahead

Environmental, social and governance reporting is a must for corporations. Are you doing your due diligence in your risk assessments?
By: | June 5, 2021

Look back at the past year, what stories, other than COVID and the presidential election, dominated every news outlet? Social and environmental issues: climate change, health care inequalities, labor union rights, voting rights.

And it’s not just the news media focusing on these issues; investors more and more frequently investigate corporate responsibility and sustainability as part of their due diligence before investing. 

Focus on corporate sustainability goes hand-in-hand with increased demand for corporate environmental, social and governance (ESG) reporting in addition to standard financial reporting.

Socially-conscious investors want to know that companies care about how their business affects people other than shareholders just as much as they care about profits. Institutional investors want to know that companies have adequately evaluated the risks they face from ESG issues, whether supply chain disruption, labor disruption or even cyber attack.

ESG reporting is now more the norm than the exception. However, companies need to take the next step and fully integrate consideration of ESG issues into their enterprise risk management efforts.

This was top of mind for several RIMS LIVE 2021 speakers this year during April’s “Your New Challenge: Environmental, Social and Governance Reporting and Risks” session. Speakers Jana Utter, vice president, ERM, Centene Corporation; Robert Hirth, Jr., chairman, Protiviti; Suzanne Christensen, CRO, Invesco; and Michael Zuckerman, associate professor in risk and insurance management for the Fox School of Business at Temple University shared insights and tips on ESG risk reporting.

Below is an overview of ESG, touching on the main points the speakers discussed.

What Is in an ESG Report?

ESG reports provide investors with an overview of a business’s impact on the environment and social justice issues and how the company ensures the integrity of its own governance.

But ESG reporting is more than just a tool for encouraging investment by socially conscious investors.

It has also become a way for investors to assess a company’s sustainability and as a result, their risk exposure. Because investors are using ESG information to evaluate risk, companies should also be integrating ESG data and reporting into their enterprise risk management efforts. Thoroughly evaluating ESG issues is not always simple, but the effort is necessary.

Breaking Down Environmental

Environmental reporting will likely find even greater prominence in coming years, particularly as companies address compliance with the Biden administration’s targeted 50+% reduction in greenhouse gas emissions by 2030.

Indeed, under President Biden, the SEC has been instructed to “enhance its focus on climate-related disclosure in public company filings.”

Company carbon footprints will feature prominently in future corporate environmental reporting, even more so than they already do. Calculating carbon footprints is one example of the difficulties with fully evaluating ESG issues. It can be quite complicated, particularly if a company intends to include reporting on what are known as Scope 3 emissions, which include all indirect emissions from the corporate value chain, both upstream and downstream.

Scope 1 emissions are those closest to home: direct emissions from sources your company owns or controls.

Scope 2 goes a little farther afield, including all indirect emissions resulting from your company’s consumption of purchased energy, steam, heating or cooling.

To make matters even more complex, there are several different accepted protocols for calculating carbon footprint. 

Environmental reporting includes far more than just carbon footprint. How does a company deal with hazardous waste disposal, ownership of contaminated sites, usage of land shared by endangered species, water and air quality and energy efficiency? These issues, among others, set the foundation for environmental reporting.

A Look at the Social Side

The concept of social responsibility immediately brings to mind support or opposition to voting laws, as numerous corporations recently ceded to public pressure to take public positions on this issue. But underlying events like these is a much larger question: What are a company’s values?

A company’s positions on voting rights, human rights, gender and diversity equality, financial inclusion, and many other social issues are important to investors.

Socially conscious investors look for companies that share their values.

Company values on social issues and company compliance with those values are also indicators of potential corporate risks. For instance, if a company fails to take a stand on an issue of current social importance, will it suffer losses due to boycotts? Does a lack of diversity expose the company to potential lawsuits?

Finally, Corporate Governance

Investor interest in corporate governance is nothing new. Socially conscious investors want to be sure your company acts ethically and considers the interests of employees and shareholders, rather than just management.

They also want companies to be transparent about their governance.

The effectiveness of corporate management, its regard for ethical business behavior, its compliance with accepted accounting procedures, its inclusion of shareholders in decision making, and its engagement with politicians all factor into potential investment decisions.

Some risks and concerns, such as cyber security, span several ESG categories. Cyber security is a top concern for investors and with good reason. One need not look further than the recent Colonial Pipeline ransomware attack to see why. 

Aligning ESG Reporting and Risk Management

While there is no single accepted way to begin ESG data collection and reporting, there are several steps every company should take. The first is to identify and engage the appropriate stakeholders.

Working with stakeholders, businesses must identify the business impact of ESG issues. Businesses must then align specific ESG concerns with the relevant stakeholders and develop strategies for setting policies, goals and performance metrics.

Without concrete plans, ESG reporting is merely lip service that investors will see through. More importantly, it will not help the company to avoid potential ESG risks.

Once a framework for assessing ESG issues exists, the company can begin collecting and analyzing the necessary data to establish baselines and concrete performance goals. Then it can determine how it will report that data.

Effective reporting will show that a company understands the significance of both the issues  and its own actions. ESG reporting should tell a story that potential investors want to hear, the true story of how a company applies its values to address issues of global significance.

But it should also tell investors that the company is vigilantly analyzing the risks these issues pose to the business and taking the necessary steps to address them. That makes a company sustainable and a good investment. &

Kiara Taylor has more than 10 years of experience in finance, ranging from fixed income to emerging markets. She enjoys writing on the impact of both micro and macro trends on global finance. She can be reached at [email protected].

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