Why sustainability? Because risk evolves and risk management should too

Abstract

This paper discusses the evolution of risk management to include the sustainability risk space, which has developed a range of approaches to measure and manage so-called nonfinancial risks (such as extreme climate change-induced catastrophes, data fraud and theft, and social ills, to name a few) that can pose significant micro- and macroeconomic threats. We note that, although the practise of sustainability risk management is still evolving, environmental, social and governance (ESG) standards and metrics have emerged that may help companies in their strategic planning and decision-making processes, as well as in measuring, managing, mitigating and/or where appropriate eliminating these material ESG-related risk exposures. Secondly, the paper summarises selected approaches to corporate sustainability reporting and observe that the Sustainability Accounting Standards Board’s industry-specific, financially material framework is uniquely well-suited for use in the context of identifying, assessing, responding to, and monitoring enterprise-level risks and opportunities. By drawing explicit links between sustainability and finance, this materiality-driven perspective has been shown to help companies enhance return on assets and return on equity, as well as risk-adjusted shareholder returns. The paper analyses shareholders’ increasing interest in ESG risks, opportunities, and related data, which helps them analyse performance across corporations and allocate economic capital to its best, most efficient users. Ultimately, investor-focused ESG reporting can help corporations address risks and opportunities in a way that is mutually beneficial to the organisation, its shareholders, and society at large, incentivising companies to become better global citizens and leading to more sustainable and inclusive economic growth and development. The paper concludes by suggesting business is the best agent for change that can help transition to a more robust and resilient global economy.