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

Applying a broader definition of value can serve as a starting point for understanding the complete business
context in which an entity operates. A multi-capital approach brings together material considerations about an
entity’s strategy, governance and performance and presents them in a way that reflects the commercial, social
and environmental context. Table 2.2 sets out a series of questions to support a more complete understanding
of the business context, adapted from the <IR> Framework.

Table 2.2: ESG-related risk considerations to understand the complete business context
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Content element Questions to consider
Organizational • What are the external environment aspects of the legal, commercial, social, environmental and
overview and political context that affect the entity’s ability to create value in the short, medium and long term?
external • What do the entity’s mission and vision require from an ESG perspective?
environment
• How does the ESG context link to value creation for the business more broadly?
• What are the megatrends likely to impact the entity? In particular, which societal issues (e.g.,
demographic changes, health, poverty) or environmental challenges (e.g., climate change, resource
shortages, planetary limits ) impact the entity?
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• What are the legitimate needs and interests of key stakeholders from an ESG perspective?
• What are the relative ESG-related strengths, weaknesses, opportunities and threats (SWOT)?
• Which shifts in the regulatory or legislative environment impact the organization?
Inputs • What are the ESG issues for the capitals that the business relies on, such as
ecosystem services, raw materials, natural resources, labor and water sources?
• How do the stocks and flows of capitals, on which the business depends, impact the robustness and
Value creation process Business model Business activities • What is the value chain of the entity?
resilience of the business model?
• How does it differentiate itself in the marketplace?
• What is the revenue-generating model?
• How does the entity innovate?
• How well is the entity designed to adapt to change?
Outputs
• What are the outcomes and contributions (e.g., employee engagement, reputation,
Outcomes • What are the impacts or potential impacts of the products or waste across the value chain?
customer satisfaction, societal acceptance, environmental impacts and license to operate)?
Strategy and • How does the entity define short, medium and long term?
resource allocation
• What are the organization’s short-, medium- and long-term strategy objectives?
• What are the ESG impacts and dependencies to achieving those objectives? In particular, what are
the medium- to long-term risks that will impact strategy (e.g., climate change)?
• To what extent have environmental and social considerations been embedded into the strategy to
give it a competitive advantage?
• Which ESG-related risks should be reflected in the strategy?
• Which resources and capital allocations are required to implement the strategy?
• How are stakeholder interests incorporated into strategy development?

To support the answers for these questions, sustainability practitioners can draw on their own experience, for
example, the knowledge derived from certifying the entity in accordance with the ISO 14001 environmental
management system or from participation in sustainability-focused organizations or industry collaborations.
Risk management and sustainability practitioners can also use a selection of tools and resources to understand
the impacts and dependencies on the entity. Some commonly used approaches include megatrend analysis,
SWOT analysis, impact and dependency mapping, ESG materiality assessment, stakeholder engagement and
a range of other ESG-specific resources, each explored below.

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j See Appendix IV for more guidance on planetary boundaries.
Enterprise Risk Management | Applying enterprise risk management to environmental, social and governance-related risks • October 2018 27