Should Your Board Take ESG Risk Materiality More Seriously?

manage ESG risk
Rather than wait for a security breach or other negative episode, directors should consider taking the following three steps now.

A recently released BDO 2023 Board Pulse Survey suggests that some directors may be a bit conflicted about how ESG risk materiality may affect their organization. While the survey revealed that two-thirds of the 200 directors polled said ESG matters pose minimal risk in 2023, more than half of those surveyed said ESG issues such as natural disasters, public health crises, data breaches and talent shortages pose some or significant risk. Companies may also face additional risks this year caused by economic uncertainty and restrictions on access to capital that may make it more difficult to sustain profitability. As a result, corporate board members will be challenged to come to agreement on which ESG issues present minimal or significant risks and then work together with management to determine strategies to mitigate those risks.

“No company is immune to ESG risk,” says Amy Rojik, head of BDO’s Center for Corporate Governance and Financial Reporting. “From recruitment and retention challenges to regulatory changes to extreme weather, ESG risks will affect operational and reputational excellence for companies of all industries and sizes.”

Rojik says boards should resist the temptation to wait until regulators require disclosures or other measures to protect shareholders from ESG-related risks before taking actions to protect their bottom line.

“Organizations that proactively identify and mitigate the material ESG risks impacting their business and prepare for ESG disclosure requirements will be best positioned to capture a competitive advantage and address stakeholder expectations,” she says.

Rojik advises boards to do the following if they want to take steps to mitigate ESG risk:

Conduct a self-assessment. “The best first step is to conduct a self-assessment – or partner with a trusted advisor – to identify the material ESG risks to their business. C-Suites should be asking themselves not only what environmental, social or governance risks their organization faces currently, but also what risks may emerge given the dramatic supply chain, demand, regulatory and stakeholder changes that are sweeping the markets,” she says.

Create an ESG risk management team. Rojik advises companies to “assemble a cross-function team with an ESG lead at the helm.” This team can act as a crisis-management team that specializes in ESG risk-related matters. It can also be helpful in creating any new ESG-related disclosures in the future.

Strengthen oversight of management’s ESG strategy. Rojik says, “Boards and their subcommittees should clearly define and articulate their role in the oversight of management’s ESG strategy. Establishing KPIs for management and monitoring the metrics will be key to driving accountability and progress.”

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