Greater Alignment of Corporate Sustainability, Compliance, and Risk to A Better Growing ESG Issues Management
Corporate sustainability, risk management, and compliance have typically been considered three separate disciplines. However, there is growing concern about the issues surrounding environmental, social, and governance (ESG), which can be addressed by a closer alignment.
Many of the challenges facing corporate heads regarding ESG have traditionally been solved by addressing each issue separately. Corporate sustainability involves aspects of compliance as well as risk management, with the main focus being on the long-term well-being of the company, all stakeholders including shareholders, the environment, and society in general. Risk management has to do with predicting and mitigating possible risks, and compliance is focused on the continual adherence to all rules and regulations for legal purposes.
If companies want to effectively manage these issues they must first recognize that they are intertwined. Although bringing the firm’s corporate sustainability, risk management, and compliance programs into greater alignment will add cohesion and consistency in these three areas, the programs should not be completely consolidated into one overall program. They have distinctive attributes and different priorities that do overlap in certain instances, but total integration is not the best approach.
A company’s long-term sustainability is now more dependent on managing risks and staying compliant than ever before. It is no longer just something environmentalists or health and safety proponents are interested in, but an important strategic issue that companies should prioritize. We’ve seen that as companies begin focusing on sustainability, all three areas are showing more convergence.
Addressing corporate sustainability more aggressively allows the other two issues (risk and compliance) to expand their focus and take advantage of opportunities that come along. In the meantime, those in charge of sustainability can work towards getting their concerns addressed by the company’s risk management team. If an ESG issue shows up in a firm’s risk assessment, it must be mitigated. This means that senior managers must take ownership and be held accountable, which makes this a business imperative. Moreover, since the industry is moving towards stakeholder capitalism, management must get involved in multiple roles, which requires fluency in more areas than just their main expertise.
All three areas would be strengthened if there were more collaboration, but the area that would certainly benefit the most is corporate sustainability. This could work if each area brought its expertise and processes to the table for the benefit of the other two areas. Because corporate sustainability is likely the most recently added function, those in charge could potentially learn the most from the others.
For example, the area of compliance can encourage an emphasis on follow-through because they know that rules and regulations are not worth the paper they’re written on if there is a lack of follow-through by everyone. This also applies to corporate sustainability since social and environmental commitments must be followed through. The risk management team can illuminate the “risks of inaction” to encourage that mindset. With this mindset, it is clear that corporate sustainability is not simply about saving money, but more about recognizing and addressing the risks that could affect the firm’s long-term success and viability.
Corporate sustainability must recognize that this is a multi-stakeholder issue that requires a forward-looking approach and perspective. The focus should include finding opportunities, not just avoiding risks. It needs to focus on specific processes and functions not undertaken by other areas. For example, encouraging materiality analyses to look at important issues that the company and stakeholders consider a priority, rather than just making sure that the company complies with the law. As the number of ESG issues continues to grow, corporate sustainability teams must continually be looking ahead.
Considering the risks of inaction, compliance must increase their ability to be more forward-thinking. The same holds for corporate sustainability, which not only reports on risks but must also work at finding opportunities for achieving a competitive advantage. There are several ways to get the three functions to coordinate and collaborate more effectively to increase alignment. It would be great if they could do this synergistically over time, but time is in short supply with an undertaking so critical.
Therefore, it is vital that companies quickly identify areas where a natural fit already exists, listen to all stakeholders including investors, and get these three teams to understand the importance of greater alignment. It is up to leadership to champion their coordination and collaboration. Coordination can also be increased by the company reorganizing to increase harmony between the three areas. For example, a single executive could oversee all three areas in managing the company’s risks and reputation.
This might involve creating a steering committee for sustainability that includes personnel from risk management and compliance while incorporating processes from sustainability into the yearly risk management process. Personnel from sustainability could also be added to the compliance review committee. A company’s internal audit team could be directed to add sustainability to the functions they routinely audit, including risk management and compliance. Personnel can make recommendations as to best practices for the three areas.
Companies may want to conduct a mapping exercise across all three functions to examine material issues for areas where they potentially converge and diverge. This could help them see where they might benefit from closer collaboration and where it might not be productive. For example, the climate might be an area where a convergence could help the company come closer to achieving its goals.
The compliance team focuses on making sure that the company adheres to the laws that regulate the firm’s effect on climate, whereas the risk management team evaluates the risks that climate change will have on the company over time. And the corporate sustainability team is charged with focusing on both the climate’s effect on the company and vice versa, how the company’s operations affect climate. Each area contributes its processes and expertise to benefit the others. Therefore, companies may want to evaluate the priorities and focus of each area to determine where they intersect and integrate those.
Restructuring the company’s organization, conducting cross-training, and establishing new policies of governance can result in a closer alignment between these three areas. This would keep the company in compliance with regulations, and mitigate risks while enhancing corporate sustainability. Each area would continue functioning independently while collaborating where they can, taking full advantage of their interconnectedness. Companies that can quickly create this balance will be well positioned for long-term success.