Operationalising ESG: an opportunity for risk managers

As calls to accelerate the growth of green and sustainable finance become louder, companies are under pressure from regulators and social media alike to implement comprehensive ESG plans

Companies need to identify and implement frameworks for environmental, social and governance (ESG) compliance, as pressure from social media, non-governmental organisations (NGOs) and regulators is growing, said speakers at a May 19 webinar convened by Asia Risk and Archer Integrated Risk Management, a US provider of risk management solutions.

“Ultimately, ESG equals change, so there will be a time of transition. How your organisation operates today is not as it will operate in the future. With the advent of social media, everybody is in the crosshairs. So, if you’re setting a target to meet in future, you will be held accountable for that target,” said Gerald Nunez, senior ESG specialist for Asia-Pacific and Japan at Archer Integrated Risk Management.

“Nowadays, organisations are looking at social media chatter, what people are actually saying about your product, about your organisation. That minutiae that wasn’t available five or 10 years ago is now available. Their voice is material. Suppliers, buyers … everyone has a voice. How do I measure those voices? And how do I apply it to business strategy and operations going forward?” Nunez said.

Listed companies face pressure from their stock exchanges on their disclosure on ESG matters, said Jason Norman Lee, legal and regulations managing director of Temasek Holdings, a Singapore sovereign wealth fund.

“If you look at the past two or three years, there has been a lot of regulatory pressure as well as stakeholder requests to enhance the ESG framework, and I believe risk would be naturally involved,” said Geethy Panicker, Singapore head of enterprise risk at HSBC.

Companies have to engage with regulators and NGOs, said Panicker. “Regulators, as well as NGOs, are looking at how well we are performing.”

In Hong Kong, for example, the Hong Kong Monetary Authority (HKMA) and the Securities and Futures Commission initiated the establishment of the Green and Sustainable Finance Cross-Agency Steering Group in May 2020, which aims to accelerate the growth of green and sustainable finance in the city and support the Hong Kong government’s climate strategies through such means as examining policy and regulatory issues in green and sustainable finance. Since then, the steering group has made progress towards mandating climate-related disclosures by 2025 across relevant sectors, according to an HKMA press release on December 16, 2021.

In December 2020, the Monetary Authority of Singapore issued guidelines for environmental risk management for banks.

At the 2021 UN Climate Change Conference (COP26) held in Glasgow between October 31 and November 12 last year, countries were asked to submit emissions reductions targets for 2030 that align with reaching net zero by the middle of the 21st century.

More than 140 countries have declared a net-zero commitment, which represents more than 90% of global emissions, Panicker pointed out. Close to half of the wealth customers in Singapore have indicated their portfolios will be 100% ESG-compliant or ESG satisfactory over the next three to five years, she added.

“Over the past few years, particularly after the Covid-19 pandemic period, the debate is no longer about why sustainability is needed, but how to pursue it in a more pragmatic manner without a significant disruption to the stakeholders – both the affected corporations and the social fabric as well,” said Panicker.

“The same is the case with large corporates where there is immense regulatory as well as stakeholder pressure, and expectations to disclose their carbon footprint, their ESG-related ratings or their compliance with the ESG framework,” she said, adding that HSBC Singapore has a dedicated chief sustainability officer, leaders for climate finance and leaders for climate risk management.

Implementation

Companies need to have a risk framework, Nunez said. “Setting that policy and framework is key to being able to educate the rest of the businesses to what ESG means to them. Then they will be able to actually understand the opportunities and risks associated with that.

“You’ll be held accountable for whatever targets you set. So you need to be firm in your concept of materiality, risk assessment and, where possible, risk quantification. That last one is particularly difficult because the subject matter is very diverse. The metrics you are being asked to report on are not necessarily financial metrics. So you need to find what you need to report on and how people expect you to report on it, in such a way that it is a repeatable process so you can benchmark how you are achieving it over time.”

ESG risk is a new risk but should not be seen as separate from a company’s overall risk framework, said Lee. “Make sure the understanding of ESG is embedded in the organisation itself.”

“If you are an investment manager, you would look at a whole bunch of risks before you do something. ESG risk itself should be embedded in the investment life cycle,” he added. ESG should also be embedded into a company’s overall risk management framework. Lee further explained that ESG should be integrated into the various risk factors of a company, including credit risk, counterparty risk and supplier risk.

The ‘E’ component of ESG risk, environmental risk, includes multiple types of risks: liability risks if no commitments are made, implementation risks, those from customers, as well as the risk of not meeting regulations such as those from global regulators, Panicker explained.

As for the ‘S’ component, sustainability, in the post-pandemic world, it is gaining traction, Panicker noted. Customer safety, product safety, gender diversity, all of which come under S, are gaining traction, she explained. “If you don’t focus on sustainability, you will not have people with the green skills.”

The challenge is that the return on sustainability is less tangible than the return on environment, with difficulties on how to measure it, how to report it and defining the different metrics, Panicker said. “It takes time to move the dial on S.”

She added:“This is also a moment where we have to be very cautious. We have to ensure all this transition is done in a very compliant manner and without any greenwashing is to be encouraged or it has to be prevented.”   

It is critically important for companies to have an overall governance framework, an ESG strategy, as well as key metrics and targets to measure themselves against, Lee said. “Governance strategy, targets and metrics. Look into these three things. That is going to be key to the success of your programme.

“For many firms, the first thing they have to do is to get their governance process is in place … and then have a strategy on how to assess ESG risk and opportunities against their financial performance, their stakeholders, and so on. Then metrics and targets so, with this, they hold themselves accountable to reaching certain things.”

“Whether you like it or not, your stakeholders still hold you accountable as an organisation,” Nunez said.

Companies should consider what data points they need to collect and what sort of governance they need to put in place to ensure the data is accurate, he added. “That is key. Otherwise, you may have to go off on a tangent and collect data your stakeholders don’t think is relevant.”

Companies need to have adequate data, Panicker said. “The lack of data is actually holding back progress.”

Companies may have to create data, where they may have to partner with third parties such as data providers, she added.

Opportunities

To beef up their ESG capabilities, some companies will require a substantial amount of handholding, from both the government as well as the financial sector, Panicker said. “So I look at this spectrum as a tremendous opportunity. There are also a lot of opportunities globally.”

Temasek’s Lee concurred: “There is risk involved, but there are also wonderful opportunities.”

There is demand for ESG-compliant funds, Lee stated. Being compliant with ESG is a chance for companies to affirm themselves as attractive places to work, and thus attract employees, he said.

“Having those targets to meet is opening up massive opportunities for organisations to retool and repurpose themselves. There are a lot of new products coming out the market,” Nunez said. Five or 10 years ago, recyclable plastics did not exist, but are now used for a multitude of different products, he added.

If a smaller firm’s products are ESG-compliant, that will differentiate them from other firms, Nunez pointed out. “That is an opportunity.”

A tremendous opportunity is available to organisations to maximise their interaction with their stakeholders, Nunez said. By understanding that, companies will be able to position themselves for the future: “Identify what stakeholders want and how to execute that is key. Good behaviour will be rewarded.”

The panellists were speaking in a personal capacity. The views expressed in the webinar or this article do not necessarily reflect or represent the views of their respective institutions.

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