Page 571 - COSO Guidance

2. Strategy and objective-setting for ESG-related risks

This chapter outlines the following actions to help risk management and sustainability practitioners evaluate the
business context while considering a broader perspective on how an entity creates, preserves and realizes value:

Examine the value creation process and business model to understand impacts and dependencies on all
capitals in the short, medium and long term. To assist with this understanding, conduct:
- Megatrend analysis to understand the impact of emerging issues in the external environment
- Strengths, weaknesses, opportunities and threats (SWOT) analysis
- Impact and dependency mapping for all types of capital
- An ESG materiality assessment to describe significant ESG issues
a
- Engagement with internal and external stakeholders to understand emerging ESG trends
- Analysis leveraging ESG-specific resources
Throughout the risk management process, align with the entity’s strategy, objectives and risk appetite

Consider the ESG-related risks that will impact the entity’s strategy or objectives

Value creation and the business model
According to the COSO ERM Framework, an entity’s value is created, preserved, eroded or realized based on
the relationship between the benefits derived from resources deployed and the cost of those resources. The
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value of an entity is largely determined by the decisions that management makes – from the overall strategy
to day-to-day decision-making. Effective ERM helps boards and management optimize outcomes to enhance
capabilities for creating, preserving and ultimately realizing value.
Historically, this value has been measured primarily on the financial and economic factors that impact an
entity’s tangible assets. However, this has shifted rapidly. According to a study by Ocean Tomo, between 1975
4
and 2015, the value of intangible assets as a proportion of total enterprise value among S&P 500 companies
increased from 17% to 84%. The concept of value has also broadened to encompass shared resources
between an entity and wider society. Capital is no longer a singular term; it has evolved to speak of the multiple
stocks and flows of capitals, recognizing the range of resources upon which entities rely.
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As such, organizations may want to adopt a definition of value creation that goes beyond financial value
and also considers value to a broader group of stakeholder and/or society. Acknowledging that there is no
universally agreed definition of value creation, the former Technical Task Force of the International Integrated
Reporting Council (IIRC) established a Technical Collaboration Group, which defined ten themes that inform
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the meaning generally and consider a more comprehensive definition of value. These themes are
described below. b

Ten themes that inform the meaning of value creation
1. Value creation takes place within a context
2. Financial value is relevant, but not sufficient, for assessing value creation
3. Value is created from tangible and intangible assets
4. Value is created from private and public/common resources
5. Value is created for an organization and for others
6. Value is created from the connectivity between a wide range of factors
7. Value creation manifests itself in outcomes
8. Innovation is central to value creation
9. Values play a role in how and what type of value is created
10. Measures of value creation are evolving

. . . . . . . . . . . . . . . .
a An ESG materiality assessment is an exercise in stakeholder engagement designed to gather insight on the relative importance of specific environmental, social and
governance (ESG) issues.
b Note that these themes are based on input from the lead participants of the Technical Collaboration Group (TCG) from a range of disciplines and countries. They reflect the
collective views of TCG participants, not necessarily those of their organizations or the IIRC.
24 Enterprise Risk Management | Applying enterprise risk management to environmental, social and governance-related risks • October 2018