Page 589 - COSO Guidance

3. Performance for ESG-related risks

Table 3a.2: Example ESG-related risks or opportunities

Type ESG-related risk or opportunity Environmental Social Governance
Strategic • Shifting customer preferences toward products that are
manufactured with ethical supply chains
• Growing investor interest in ESG issues, resulting in proxy
voting against the company on a range of topics
(e.g., diversity, deforestation and human rights)
Operational • Increased cost of raw materials due to sustainable forestry
practice requirements
• Reduction of waste and raw material costs through
improved manufacturing processes
• Changing weather patterns and increased natural disasters
disturbing operations and business continuity
Financial • Reputation impacts and societal concerns due to a tax
avoidance strategy and lack of tax transparency
• Investment in local content to generate sustained and
inclusive growth through economic diversification and
employment opportunities
• Increased taxation from carbon tax regulation
Compliance • Enhanced reporting requirements for greenhouse gas
emissions and energy usage
• Inaccurate or fraudulent disclosure of emissions resulting
in fines and penalties and loss of consumer trust

In many cases, an ESG-related risk impacts several or all of these categories. For example, human rights-
related risks are predominantly operational; however, some jurisdictions have compliance requirements relating
to human rights in the supply chain.

State Street identifies emerging risks
a
State Street Global Advisors (SSGA) is one of the world’s largest asset managers. Recently its sales
function identified a new risk and opportunity: gender diversity. Management identified related megatrends
and early studies showing that companies with higher rates of female participation at the senior
management level benefit from return on equity, reduced volatility and fewer governance-related issues.
SSGA implemented a three-pronged approach to address this risk and opportunity. Employees in
operations, leadership and corporate governance started the Fearless Girl campaign, modified the Asset
Stewardship Program and launched a gender diversity index. Identifying this risk and implementing a
response have helped increase awareness of gender diversity’s impact on company performance, attract
clients who want to promote gender diversity and promote the long-term value for clients’ investments. b

Approaches to identifying risks
Many entities have an ERM process in place to identify risks that
impact the business strategy and include them in the risk inventory. Guidance
This process may include surveys, workshops and interviews with risk
owners and executives to confirm existing risks or understand new or Involve ESG risk owners and
emerging risks. For entities with enhanced ERM processes, this may sustainability practitioners in
5
also include quantitative and in-depth analytical approaches. the risk identification
In addition, entities have ongoing activities and processes performed process to leverage
by the sustainability function, corporate strategy function or risk subject-matter expertise
owners that can support the identification of ESG-related risks.

. . . . . . . . . . . . . . . .
a SSGA has USD$2.73 trillion under management, making it the third largest asset manager in the world. SSGA is a pioneer in index investing and has capabilities spanning
both traditional and non-traditional asset classes across both active and index investing. See ssga.com for more info.
b A full case study is available at wbcsd.org. (WBCSD (2017). “State Street Global Advisors: Gender diversity as an opportunity to reduce investment risks.”
42 Enterprise Risk Management | Applying enterprise risk management to environmental, social and governance-related risks • October 2018