The Global Risks Perception Survey 2022-2023 (GRSP) administered by the World Economic Forum captured the top 10 risks in the two-to-five-year landscape.
With regards to environmental risks, the GRPS’s results are alarmingly telling: (i) 5 risks in the next 2 years and (ii) 7 risks in the next 5, including 4 among the top 5.
Keeping in view the GRPS’s results, an important question comes to mind – What emerging risks are businesses exposed to? Based on the above, ESG/Sustainability is an immediate answer.
Although some in the fraternity undermine the significance of ESG as a risk and question its importance to a company’s business model, the need to evaluate and address ESG concerns still remains. Failure to seriously address ESG concerns poses a serious threat to the long-term sustainability and existence of the business.
Risk and governance are integrated concepts. This makes a strong case to address ESG risks through a proper and formalized governance framework.
A suggestive governance approach with respect to ESG is outlined in IFRS S1 issued by IASB and adopted by SECP for phased implementation in Pakistan commencing from accounting period beginning on or after January 01, 2025. To support its ESG agenda, a company can take the following steps to strengthen its governance structure:
Business strategy:
Usually, a company follows a business strategy, which is centered to its mission and vision statement. It is important to integrate its ESG strategy within its business strategy. Not only will this increase focus and generate more visibility towards ESG concerns but will foster engagement at various levels within the organization.
A company’s ESG strategy, similar to its business strategy, should be reviewed, revised, and updated on a defined periodic basis to ensure alignment to its overarching goal of sustainable business growth. It is also essential for a company to factor in stakeholders’ expectations pertaining to sustainability into its overarching strategy.
Thus, a company should pay particular attention to its interactions with different stakeholders and consequently evaluate them for key insights into how their views on sustainability are evolving.
Stakeholder engagement:
A constantly changing business environment, particularly due to the influx of different social media platforms, underscores the need to establish and maintain strong streams of engagement with stakeholders. This would allow companies to better understand their shareholders’ expectations and accordingly adjust in their business strategy.
As a process, the company should first identify its stakeholders using an identified methodology.
This can be considered as one of the most critical activities on which the foundation of entire ESG programme rests.
Stakeholders would never be the same for any two companies; they would vary from company to company to sector to business ideology. For example, the stakeholders, for an insurance company would differ from that of a textile manufacturer and exporter.
This is because, amongst many other factors, their customer stream, product proposition, and regulatory regime are vastly different. Once the stakeholders are identified, this activity requires further categorization to focus on a phased approach while taking up the major stakeholders in the first place.
Material topics:
The next step involves engaging the identified major stakeholders and understand their expectations from the company in terms of ESG.
A company can adopt different modes of engagement, ranging from personal meetsto sending outwell-crafted questionnaires. These questionnaires are key tools as they enable the company to plan and prioritize to meet stakeholders’ expectations and to serve them better.
Thus, it is the company’s responsibility to make stakeholders recognize the importance of a correctly filled questionnaire and encourage them to fill it. Once stakeholders’ responses are recorded, they should be filtered to create a prioritization hierarchy, and a plan should be devised to address them.
This would provide a holistic view to the company about what the different stakeholders expect from it with respect to ESG. This is integral as otherwise a company can fall into the trap of conducting various ESG-related activities but without alignment with their stakeholders’ requirements and expectations.
Targets:
The company, based on the key stakeholders shortlisted and their material topics, should set targets which can be achieved in the next three to five years’ time window. This would facilitate in the following manner:
Better visibility to align resources with stakeholders’ expectations;
Prioritization of milestone based on what is material and important keeping in view stakeholders’ expectation;
Inculcating ESG into culture, business plans and execution;
Setting budgets for ESG; and
Breaking targets over a period of time to monitor periodic progress.
Conclusion:
Once the company has decided to embark on its ESG journey, it is important to identify the stakeholders and their material areas of interest. The next step is to ensure that they are broken into KPIs so progress can be routinely monitored.
It is important to build a strong governance structure around ESG at various levels so there is constant discussion and regular reporting, including at the Board level. The Board, CEO and senior executive team has to take a lead, so this agenda penetrates to the bottom of the organization.
Copyright Business Recorder, 2025
The writer is a chartered accountant having interest in governance and ESG