Page 605 - COSO Guidance

3. Performance for ESG-related risks

Quantification of the impact of community conflict in the extractive sector

Human rights risks and impacts can be particularly difficult to quantify. A Harvard Kennedy School, Shift
and the University of Queensland study in 2014 found that most companies do not adequately identify,
understand or aggregate the cost of conflict with local communities, which can include contractual
disputes, lost productivity and suspension of operations. Estimates suggest a USD$3-$5 billion project
will suffer losses of USD$20 million per week of delayed production due to local communities’ opposition.
This assessment provides a strong business case for developing human rights and stakeholder
engagement programs to mitigate this risk. 31

Data, parameters and assumptions can be based on historical entity experience (such as supplier spend
or revenue) or proxy or extrapolated experience (such as the revenue and cost impact experienced by a
competitor due to a product recall). These examples help to identify the value at stake for a selection of risks.
See Appendix VI for some ESG examples that can be used to support these assessments.
Valuation can also be performed using methods that require more extensive data sets and subject-matter
knowledge. A few examples of commonly used valuation approaches are shown in Table 3b.9 while other
methods are included in the Natural Capital Protocol and Social & Human Capital Protocol. 33
32
Table 3b.9: Examples of ESG valuation approaches
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Resource Examples
Abatement costs – the costs TruCost estimates the “social cost of carbon” by monetizing the damages associated with an
associated with limitation, incremental increase in greenhouse gas emissions in a given year.
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prevention or repair of impacts
(mostly used for environmental
impacts)
Contingent valuation – survey-based A contingent valuation approach was used to estimate consumer willingness to pay for food
approach to value non-market safety health outcomes. It is estimated that there are about a million cases of foodborne
resources disease in the UK each year, resulting in 20,000 hospital admissions and 500 deaths. Most of
this illness is caused by microbial pathogens such as viruses and bacteria. The objective of this
was to estimate this cost, for example, the willingness to pay to avoid pain, grief and suffering
associated with illness and/or death caused by microbiological pathogens, chemical and
radiological contaminants and allergens.
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Value-based pricing – estimation “Value-based pricing is the method of setting a price by which a company calculates and
based on the next best available tries to earn the differentiated worth of its product for a particular customer segment when
alternative compared to its competitor.” For example, a company can focus on a specific segment – such
as buyers of paper towels made from recycled paper. The company would then compare
the value against the next best available alternative, e.g., non-bleached paper towels. The
company would determine the product differentiators (e.g., recycled and compostable) and
estimate a dollar value on that differentiation (e.g., $0.75 per paper towel roll).
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Value (benefit) transfer – A benefit transfer approach was used to estimate the potential benefits from protecting and
estimation method transferring restoring the wetlands in Michigan. The researchers applied the values proposed in an Ohio
information from another location study to coastal residents of Michigan. This enabled the researchers to determine monetary
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or context to that in question values for the Michigan wetlands.

Assessing ESG-related risks is inherently uncertain, which may lead organizations to avoid monetary
quantification. These forecasting tools enable management to develop its best risk assessment based on the
information it has, while being transparent about limitations. Good practice does exist, and this should be
leveraged. The examples below show how to use a range of internal and external data to develop monetary
risk assessments.

58 Enterprise Risk Management | Applying enterprise risk management to environmental, social and governance-related risks • October 2018