The number of risks that company boards oversee continues to grow. And with a fast-increasing number of large institutional investors looking to get answers how ESG risks could impact on the long-term value of a company, board directors need to take a fresh look at how current risk management considerations and processes take into account ESG risks.
While many environmental and social risks will be on the radar already, company boards will most likely have to include additional areas of risk, such as for example a firm’s dependency on fresh water or usable land for its production; its exposure to severe weather events; or the likelihood of public repercussions if employees in the supply chain aren’t receiving a minimum wage or are suffering under unsafe working conditions.
For many board directors these will be topics where they don’t necessarily have expertise. However, investors keep on pointing out: a key part of directors’ fiduciary responsibility is the duty of care, which in this case translates into the duty to adequately inform themselves on ESG issues. Furthermore, investors, and the wider public, are expecting that those supervising company executives ought to view the risk universe not only from the company’s perspective but, following ESG thinking, also consider risk from the perspective of shareholders and other stakeholders, such as employees, customers, suppliers, communities and regulators.
Against this backdrop, boards will need to find out which business risks are already actively tracked and monitored by management and their board, and which will have to be added. While this is a relatively straightforward exercise, it becomes more challenging to then decide how the increasing number of risks can be effectively overseen. This has lead boards to start thinking about forming a separate risk committee – a characteristic of the financial services industry, but still very rare in other industries. A Spencer Stuart survey found that in 2019 only 12% of companies in the S&P 500 have risk committees.
Overall, detailed risk disclosures are coming from a growing number of firms, indicating that board directors and management are determined to “ESG risk-proof” their businesses – to a big part guided by the UK Corporate Governance Code (The Code). Grant Thornton’s annual Corporate Governance Review found for 2019 that 78% of companies now produce high-quality risk disclosures, with businesses increasingly linking risks to company strategy and providing a barometer of trends and management concerns. And 76% of firms have strengthened their efforts to give a good level of detail on environmental matters.