ESG, Risk Management & the net-zero wave

Non-financial corporates face a perilous path if they do not follow suit and start the process of risk analysis and development of subsequent external reporting, as regulations and disclosure guidelines for sustainability, ESG, and climate change are evolving quickly for financial institutions.

Institutions worldwide have been under intense pressure in recent years to dramatically increase their overall sustainability and Environmental, Social, and Governance (ESG) activities, with a particular focus on climate risk. This pressure has come from governments, regulators, and customers. The climate change hazards that make up the "E" in ESG are undoubtedly the thing giving financial institutes the most issues. Customers and investors are receiving the corresponding criteria and expectations from companies as they formalize their ESG and climate risk processes.

Authorities are increasingly focusing on non-financial corporates in order to facilitate the shift to a sustainable economy. They are enforcing obligatory disclosures and a range of sustainability, ESG, and climate risk criteria. In addition, several corporate entities are already experiencing the first adverse effects on their operations due to the shifting regulatory and environmental landscape and the corresponding mitigating measures implemented by the governments and policy makers.

ESG Disclosure

At last, companies worldwide will have to collect, analyse, process and disclose more sustainability and ESG data. This will contribute to more attention being paid to topics such as carbon and greenhouse gas emissions, net-zero factors and the application of double materiality, with managers having a forward-looking perspective on the reported data.

Carbon and Greenhouse gas emissions (read our article: Setting carbon reduction targets) focus more on having to report on a company’s emissions. To account for this, businesses must obtain new data, set up new procedures and assumptions, and carry out new computations utilizing a recognized framework for carbon and greenhouse gas accounting, such as the Greenhouse Gas Protocol.

As far as double materiality is concerned, it is simply the classical CSR approach to look at the impact of a company on its environment which it has been around for approximately a decade. This assessment focused on closing the loop from the environment back to the company. As a result, companies have to report the risks related to ESG and how the impact their operations and activities, from a climate risk perspective. Moreover, it is to be noted that new elements should be taken into account, not only historical data but also what-ifs and future considerations to provide a more open view on how the company’s emissions are likely to evolve and how the deteriorating climate will affect the company, by also thinking about new strategies that should be implemented.

Businesses must increase the auditability of ESG operations

This will be crucial since now investors are also looking at various reports of companies to assess the ESG exposure, which is a key point in deciding which company better suits their sustainability and ESG investment criteria, appetite, and strategy. Furthermore, there are requirements stating that new information related to ESG should be included in the Annual Management report with a sign-off from the board and sometimes external auditor. Businesses must increase the auditability of their operations in this field, make sure that data gathering, storing, processing, and reporting processes are managed appropriately, and make sure the infrastructure that supports these processes is stable, transparent, and dependable.

Non-financial institutions must intensify their current enterprise and operational risk management procedures in order to accurately identify their exposures to physical hazards and transition risks, comprehend their interdependency, and evaluate possible future effects. To accurately map this unexplored region and accurately grasp how sensitive a firm's business model is, new data, skills and tight collaboration with risk, business, and strategy teams are required. Each company must create a transition plan to handle risks and an adaptation plan to deal with physical hazards going forward in light of the study conducted.