Leading with Purpose: How Boards Can Drive Sustainability Through Integrated Risk Management
The integration of sustainability into business strategy is no longer optional; it's imperative for long-term success and resilience in today's volatile business environment. The recent 2024 European Corporate Governance Conference, sheds light on the multifaceted benefits and challenges of embedding sustainability into corporate governance, emphasizing the crucial role of Integrated Risk Management (IRM).
2024 European Corporate Governance Conference – Summary
This year’s European Corporate Governance Conference was organized by EY in partnership with Accountancy Europe, BusinessEurope, ecoDa, EuropeanIssuers, Guberna, and VBO-FEB. Coinciding with the renewed agreement on the CS3D, the conference focused on integrating sustainability, risk management, and internal control demands into the business model.
The opening conversation introduced themes reiterated throughout the conference by various speakers. There was a strong understanding that sustainability demands are changing corporate governance (CG) expectations, especially from investors, even though implementation by businesses is slowing down. A recurring point was that boards are not proactive enough to adapt to this change and innovate their business model. Boards should lead sustainable value creation rather than leaving the initiative to management. However, boards often lack the resources and expertise to perform this task. AI was proposed as an aid to governance, drawing attention to South Africa's CG code, which already references AI.
Building Trust and Competitive Advantage
Shifting to a sustainable business model can significantly enhance trust with customers and provide a competitive edge. As the EY Sustainable Value Study indicates, companies taking proactive steps towards sustainability are more likely to report financial benefits. This correlation underscores the importance of viewing sustainability not just as a compliance requirement but as a strategic advantage.
Evolving Risk Management Practices through IRM
Incorporating sustainability into business strategy necessitates a continuous evolution of risk management practices. This is where Integrated Risk Management (IRM) becomes essential. The volatile macroeconomic, geopolitical, and supply chain landscapes demand that companies adopt a more dynamic and integrated approach to risk management. IRM enables companies to manage these risks holistically, ensuring that sustainability is embedded at all organizational levels. This aligns with the "visionary risk management" approach, where resilience is about adaptability and continuous improvement rather than mere recovery.
Integrating ESG Risks into ERM
Integrating ESG risks into the enterprise’s overall risk management (ERM) processes is crucial. As noted by Natalie Runyon of Thomson Reuters, the convergence of sustainability frameworks and standards is driving global consistency in ESG disclosures. Governance structures must support the integration of ESG risks into ERM processes. According to the World Business Council on Sustainable Development (WBCSD) and the Committee of Sponsoring Organizations (COSO), establishing robust governance is foundational for effective ESG risk management. Boards and executive management must understand how ESG-related risks influence company performance and ensure these risks are incorporated into strategy and ERM workflows.
Regulatory Drivers and Investor Expectations
Regulations like the Corporate Sustainability Reporting Directive (CSRD) and the Corporate Sustainability Due Diligence Directive (CSDDD) are pivotal in pushing companies towards more ambitious sustainability targets. These regulations not only enhance transparency and standardization but also reflect the growing investor demand for robust ESG reporting. Investors are increasingly incorporating sustainability metrics into their decision-making processes, signaling that strong internal controls and risk management systems, facilitated by IRM, are critical for attracting capital.
The Role of Artificial Intelligence
Artificial Intelligence (AI) presents both opportunities and challenges in the sustainability landscape. While AI can drive new business models and revenue streams, it also introduces ethical and societal risks. Boards must navigate these complexities, ensuring that AI's deployment aligns with sustainable and ethical standards. This dual focus on innovation and responsibility will be crucial as companies integrate AI into their sustainability strategies.
Overcoming Reluctance and Embarrassment
Despite the clear business case for sustainability, many companies remain hesitant to capitalize on their social and environmental initiatives. This reluctance, often fueled by a fear of backlash or a lack of familiarity with sustainability practices, must be addressed. Boards can play a transformative role by fostering a culture that embraces sustainability as a core component of corporate strategy, thereby encouraging proactive and courageous decision-making. IRM can provide the framework to manage these risks effectively.
Enhancing Governance and Reporting
Audit committees have a critical role in overseeing sustainability reporting and ensuring the quality of data and processes. The shift towards integrated reporting, where financial and non-financial data are interconnected, requires robust governance structures and continuous improvement in internal controls. This comprehensive approach will help companies navigate the complexities of sustainability reporting and meet the increasing demands of stakeholders. IRM practices ensure that all risks, including those related to sustainability, are managed cohesively.
Looking Forward
The integration of sustainability into business strategy is essential for navigating today's complex risk landscape and achieving long-term success. Boards must act decisively, embracing sustainability as a strategic imperative and fostering a culture of continuous improvement in risk management and governance. IRM plays a vital role in this process, providing a unified approach to managing all types of risks. As Luc Bertrand aptly summarized at the conference, "We have no time. We all have to move, and all boards have to change." The urgency is clear, and the path forward demands bold leadership and a steadfast commitment to sustainable value creation.
Sources:
Hobbs, A. (2024, June 12). How boards can integrate sustainability into business strategy. EY. Retrieved from EY.com.
EY. (2023). Sustainable Value Study. Retrieved from EY.com.
EY Global Board Risk Survey 2023. Retrieved from EY.com.
Runyon, N. (2024, April 11). How to integrate ESG risks into the enterprise’s overall risk management. Thomson Reuters Institute. Retrieved from Thomson Reuters.
Corporate Sustainability Reporting Directive (CSRD). Retrieved from EU.com.
Corporate Sustainability Due Diligence Directive (CSDDD). Retrieved from EU.com.
Schijf, L. (2024). Sustainability Reporting at L'Oréal. European Corporate Governance Conference.
Gallagher, G. (2024). Sustainability Pathway Value. European Corporate Governance Conference.
Van Bueren, V. (2024). Investment in Sustainable Models. European Corporate Governance Conference.
Gentner, S. (2024). DG FISMA on Sustainability. European Corporate Governance Conference.
Boillet, J. (2024). Audit Committee Assurance. European Corporate Governance Conference.
Chalvon Demersay, P. (2024). Sustainability Reporting at Solvay. European Corporate Governance Conference.
Bertrand, L. (2024). Governance and Sustainability. European Corporate Governance Conference.
Sanchez Varela, M. (2024). Climate Governance at Chapter Zero Brussels. European Corporate Governance Conference.
