As emphasis on environmental, social and corporate governance (ESG) grows globally, integrating ESG into effective risk management plays a key role in strategy development, panellists noted during a Creamer Media-hosted webinar, titled ‘The importance of integrating strategic ESG risk into organisational risk processes’, on August 22.

S&P Global Sustainable1 Middle East and Africa sustainability solutions director Patil Mesrobian said sustainability, ESG and climate change were a new source of risk, warning that, if left unaddressed, these issues could have significant financial implications for organisations.

She argued that climate-related issues were having a material impact at various levels globally, which would impact different sectors and entities in any economy.

“Those risks are global in nature, and it's going to . . . impact the different economies, the different sectors and the different entities. So the way future generations are impacted by sustainability or climate risk depends on what the actions are that we're taking now,” she said.

She suggested that organisations should identify the material ESG factors relevant for their sector, and to their internal and external stakeholders, and then integrate their strategies into their risk models.

Eskom corporate specialist in environmental management – risk and sustainability David Lucas pointed out that investors assessed a company’s risks and how it was managing these risks.

While investors historically have focussed on financial risks, he posited that investors were now adopting the concept of double materiality.

This means that investors assess the impact of ESG risks on a company’s financial position, as well as its impacts on society and the environment.

He said companies, therefore, needed to assess risks and opportunities associated with ESG and implement an agile strategy to address this accordingly.

“When you look at the need of strategy, it is about how are you ensuring that your strategy is addressing these material ESG risks that you have, how you're treating them, how you have the governance structures around them, how you are setting the metrics in place to measure and perform on it. And so it is about ensuring the integration of your ESG as another one of those risks and opportunities into your whole strategy,” he said.

Blue Semper Consulting MD Sudesh Pursad agreed with Lucas, saying ESG risks needed to be incorporated into organisational risk.

He noted that risk was one of the key drivers of the organisational strategy process, adding that it was important to consider how the risks inhibited value creation.

“That's where ESG risks need to be considered as part of the collective and holistically with organisational risk . . . it should not be seen as an afterthought. It should be fully integrated. It has its own set of drivers,” he said.

He urged organisations to consider financial and non-financial factors that contributed to their success.

“We need to consider ESG risks from the very outset, it needs to be part of the organisational risk process, and in exactly the same way as we have a risk appetite for organisational risk, we need to start developing a risk appetite for specific ESG risks,” he added.

Pursad said an ESG strategy should incorporate internal and external drivers, as well as the purpose of the organisation. He posited that the stakeholder value proposition in ESG was critical in driving the success of any ESG initiative.

Echoing this sentiment, Mesrobian noted that internal and external key drivers should be identified in the materiality assessment whereby organisations assessed what their external and internal stakeholders were, as well as adopted an impact and risk perspective, and assessed factors that were going to have an impact on the business continuity.

Thereafter, organisations should identify which key metrics should be used to inform the strategy, and then use those metrics to monitor the effectiveness and overall value that the strategy was aiming to achieve.

She explained that companies should thus select the correct methodology that is sector-specific and relevant to their asset types, ensuring they met regulatory and stakeholder requirements.

“It's a highly evolving industry, so it's crucial for the organisations to stay up to date and always look for the best practices to make sure that integration is happening in the best way possible,” she said.

Also speaking on the panel, Innovate UK: Global Alliance Africa open innovation lead Babar Javed discussed the role of innovation in managing ESG risks.

Javed discussed the need for organisations to evaluate resilience and sustainability, and consider new technologies and changing audience needs.

He also highlighted the importance of having an innovative mindset and adequate resources to support innovation.

“I think it's about thinking ahead, to be conscious that everything is changing, and to also just ensure that you have adequate resources that are going to be given towards innovation and fresh thinking,” he said.