3 Tips to Manage Sustainability Risks and Drive Value

What would happen if you had to make decisions about your company using only a portion of the financial information that is available to you? Without a holistic understanding of your company’s financial situation and value drivers, it would be tough to assess the organization’s performance, risks, challenges, and opportunities and drive long-term growth. Planning without all the information could potentially put the company at a competitive disadvantage and expose the company to greater risk.

However, that’s what happens in many organizations when they fail to fully consider the operational and financial implications of environmental, social, and governance (ESG) risks. Examples of how these risks can play out in the market include:

A beverage company’s production drops or they lose their license to operate due to drought conditions in water stressed regions in which the company operates.

A technology company faces employee turnover and sinking revenues because it fails to encourage or accept the innovative ideas of its highly skilled labor force.

An apparel company experiences a stock price drop after reports allege its suppliers are committing human rights violations.

Incorporating sustainability considerations into a company’s overall strategy and risk management practices can help to proactively address these risks and unlock potential value within an organization through cost savings, efficiency improvements and product innovation, among others. Below are three ways that CFOs and other finance professionals can get started.

Establish Effective Governance

Since sustainability and corporate performance are inextricably linked, integrated approaches to managing sustainability risks are critical. For example, with oversight by the board of directors, the CFO would address risks that affect financial performance while the chief strategy officer would address the organization’s response to material sustainability concerns. The head of operations would tackle health, safety, environmental, and process risks; human resources professionals would examine risks related to diversity, resource management, and training; and the head of procurement would identify risks related to areas such as child labor and conflict minerals in the supply chain. An integrated approach to evaluating and managing sustainability risks and resource allocation drive integrated thinking and a more holistic understanding of corporate risk and performance.

Focus on Material Matters

Material sustainability risks can have a range of short- and long-term effects on financial performance, but those risks vary by industry and organization. Not all sustainability considerations will be priorities for every organization, so identifying key ESG risks is an essential step in effective risk management. You can’t manage what you don’t measure. Total fuel consumed and the percentage that is renewable might be material for an air freight company but not for a telecommunications organization, for example. But by focusing on fuel and renewable use, the air freight company can reduce costs in the short run, while potentially avoiding the impact of regulation and also enhancing its brand over time.

Tell Your Story

73% of portfolio managers and research analysts surveyed by CFA Institute reported that they take ESG matters into account when making investment decisions. Given the heightened awareness of sustainability matters among investors, customers, non-governmental organizations and policy makers, many companies are already responding to requests for information on their ESG efforts. There are many sustainability standards and frameworks available to companies once they have evaluated their material ESG impacts, through consideration of the needs of their critical stakeholders, and mapped them to business value drivers. Companies can use the appropriate standards or frameworks to report their efforts and take control of their sustainability disclosure before other market participants provide evaluation of company sustainability performance based on incomplete or missing disclosure.

Opportunity to Learn More

Using insights gained from monitoring and tracking their sustainability metrics, companies can examine and manage sustainability performance and reporting. If sustainability concerns are on your organization’s agenda, I would encourage you to join Barry Melancon, President and CEO of the Association of International Certified Professional Accountants (AICPA) and me at the Sustainability Investment Leadership Conference, which will take place online and in-person in New York on May 17. It’s a great way to learn practical tools for driving value creation by understanding a firm’s strategic inputs and managing risk. I look forward to seeing you there.

Kristen Sullivan, Partner, Deloitte & Touche LLP

Kristen Sullivan leads Deloitte’s Sustainability Reporting and Assurance Services in the US and globally, working with clients to help them address their sustainability disclosure needs. She also serves as Deloitte’s Americas Region Sustainability Services Leader. Kristen chairs the AICPA Assurance Services Executive Committee Sustainability Assurance & Advisory Task Force.

Professionals looking at sustainability information image courtesy of Shutterstock.

3 Tips to Manage Sustainability Risks and Drive Value

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