Page 575 - COSO Guidance

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

Time horizons for considering the business context
COSO’s ERM Framework recommends that the time horizon for risk management align to that used for
strategy setting and business objectives. However, this can be a challenge for ESG-related risks, which
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can take longer to materialize, resulting in an underestimation or discounting of the potential impacts of
the risk. For example, the potential impacts of climate change may not threaten a company operations in
the short or medium term, leading the company to disregard this as a risk as it does not represent a threat
to the company's three to five year business strategy.
However, it is important to consider that value may be created in the short, medium and long term, for
different stakeholders and through different capitals. For example, the actions taken by entities today
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increase financial capital in the next quarter or year but decrease the natural capital available in 20 years.
To combat the challenge of short-termism, some companies manage risks considering 3-year, 10-year and
50-year strategic time frames. This encourages them to think about significant risks that may occur in the
future and how to make short-term decisions that support value realization in the medium and long term.

Incorporating future trends with megatrend analysis
Guidance
Megatrends are “large, transformative global forces that define the future by
having far-reaching impacts on business, economies, industries, societies and
individuals.” Organizations can use megatrend analyses to better understand Conduct megatrend
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the ESG factors that may impact the business context in the future. Think analysis to
tanks, governments, non-profit organizations, industry associations and understand the
consultancies prepare and publish research and analyses on global impact of emerging
megatrends. These reports help to identify and highlight new, complex and issues in the external
unpredictable forces and trends that may impact business, environment and environment
society (see examples in Table 2.3).

Table 2.3: Resources for identifying emerging risks

Data sources Description
World Economic Forum Since 2006, the annual Global Risks Report works with experts and decision makers across the world to
Global Risk Report identify the most pressing economic, societal, technological, geopolitical and environmental risks.
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Global Opportunity Since 2015, when the UN’s Sustainable Development Goals were adopted, the annual opportunity report
Report has mapped tomorrow’s sustainable markets. Each subsequent report builds upon the first, starting with
the top five goals in the 2015 report and expanding to describe new market opportunities. 15
Industry associations Several industry associations produce reports on the megatrends that specifically impact an industry or
sector. Examples include the Conning US and Global Insurance Industry Outlook and the Biotechnology
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Innovation Organization Industry Analyses.
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Megatrends reports Reports produced by consultancies such as Accenture, Deloitte, EY, KPMG, McKinsey and PwC
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20
21
23
22
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from consulting firms on an annual basis describe the top megatrends and an outlook on the future. They also offer specialized
reports that are industry specific, such as for mining and metals. ESG-specific megatrends reports may
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also be helpful to identify the most critical ESG trends organizations may face now and in the near future.
k
Political reports National economy planning agencies typically issue reports describing government plans for the future.
For example, the National Economic and Social Development Board of Thailand publishes a five-year
government strategy plan.
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ESG-focused Global ESG-focused consortiums of businesses, NGOs and alliances provide insights into trends,
organizations and leading practices and groups such as WBCSD, Sustainable Brands, Ceres, GreenBiz, CSR Asia, European
conferences Sustainable Development Network and the UN, including the UN Global Compact, the UN Development
Programme, the UN Environment Programme (UNEP) and the UNEP Finance Initiative.
l
Insurance company Several insurance companies annually publish reports detailing the top business risks. For example, the
reports 2018 Allianz Risk Barometer identifies the top ten global business risks based on insight from over 1,900
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risk management experts from 80 countries.
As demonstrated in Table 2.4, megatrend analysis can help organizations gain an understanding of significant
global risks, some of which are often ESG-related (e.g., climate change and increasing volatility of weather or
health and safety incidents).
. . . . . . . . . . . . . . . .
k For example, refer to CPA Australia, KPMG Australia and GRI Focal Point Australia (2014). “From Tactical to Strategic: How Australian businesses create value from
sustainability.” GRI Focal Point Australia, Sydney.
l For example, WBCSD’s “Societal megatrends and business – operating, innovating and growing in a turbulent world” identifies the key societal areas that they believe can
materially affect companies’ ability to operate, innovate and grow.
28 Enterprise Risk Management | Applying enterprise risk management to environmental, social and governance-related risks • October 2018