Page 617 - COSO Guidance

3. Performance for ESG-related risks

These changes can be made at the overall entity level or other functional or geographic level. When determining
the appropriate actions, organizations should research and leverage guidance from NGOs (such as the UN
Guiding Principles on Business and Human Rights), published standards (such as the ISO Standards on
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Air Quality or GHG Emissions) and principles (such as the Equator Principles, Principles of Responsible
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Investment (PRI) and/or industry groups or certifications).
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For example, consumer products companies can apply the Palm Oil Assessment Methodology developed by
the World Resources Institute to prioritize high-risk mills or geographies and create incentives to improve
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performance, which helps reduce the risk of deforestation on availability of raw materials. Unilever piloted this
guidance to better understand its deforestation risk. As a result, the company relaunched its 2016 Sustainable
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Palm Oil Sourcing Policy, which describes its commitment to respecting human rights, adhering to national
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laws, becoming more inclusive of smallholder farmers and increasing the traceability of its supply chain. The
company is taking initiatives to support local mills and smallholder farmers to produce palm oil according to the
standards of no deforestation as well as the related issues of no development on peat and no exploitation of
people or communities (NDPE).
Organizations can also explore options to reduce the impact or likelihood of a risk occurring. For examples, see
Table 3c.2:

Table 3c.2: Examples of reducing ESG-related risks

Risk Reduction response
Risk of increasing energy costs Switch fuel or adopt a renewable energy strategy to reduce reliance on fossil fuels that may be
impacting operational costs subject to a carbon tax
Risk of community and NGO activity Engage stakeholders through one-on-one dialogue, town hall meetings, grievance hotline
impacting business continuity in the and regular outreach to stay informed of community and NGO expectations and concerns and
mining and extractives sector address these concerns through initiatives such as community investments, land rehabilitation,
facility design or operational decisions
Risk of disruption to supply due to Diversify supplier base and work with critical or strategic suppliers (>25% source) to develop
extreme weather business continuity planning
Risk of using an unfamiliar supplier Develop and enforce the use of an approved supplier listing
negatively impacting product quality

Share: Transfer a portion of the risk or collaborate externally
Sharing ESG-related risks may eliminate some risk to individual companies for ESG-related risks, which may be
too large or complex for one entity to manage.
In responding to certain risks, an appropriate share response includes an industry- or issue-specific
collaboration with other businesses, professional bodies, governments, NGOs, regulators, suppliers,
customers, communities or even competitors. A prominent example is the agreement made at the 2016 United
Nations Framework Convention on Climate Change (UNFCC) Conference of the Parties Meeting 21 (COP 21) in
which 174 countries and the European Union supported by business and NGOs committed to goals and regular
reporting to address climate-related risks.
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Carefully managed sharing of information, expertise and priorities can result in collaborative and trusted
relationships that yield outcomes for both the business involved in the collaboration as well as society. Sharing
information, resources, activities and capabilities across sectors, issues and geographies helps achieve
scale to realize sustained impact. Consider for example the issue of plastic waste in oceans. Addressing this
issue requires cross-functional value chain involvement from chemical and petroleum companies, apparel
companies, institutional investors, consumer products and packaging companies, governments and NGOs. The
World Economic Forum argues that achieving the UN Sustainable Development Goals will require these kinds of
cross-sector alliances.
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This is particularly the case for supply chain initiatives. Entities have recognized that addressing complex supply
chain challenges requires teaming up with peers, academia, standard setters and non-profit organizations.
Multi-stakeholder collaborations focused on specific sectors, geographies, issues and commodities have
proliferated in recent years. Most industries have now developed groups that work together to create common
standards, share information, share auditing processes, increase leverage with suppliers and provide industry-
level guidance. Some examples of industry- or commodity-specific collaborations are listed in Table 3c.3.

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