The days of viewing climate change as a silo on the broader environmental, social and governance (ESG) landscape are over, with most compliance and risk managers acknowledging the interlinked risk consequences of disrupted weather patterns on the wellbeing of citizens, corporations and the economy.
“Companies that choose to do nothing about climate change will find themselves out of favour, on the wrong side of history and in some cases, very quickly, outside of the future,” said Karin Ireton, an independent sustainability consultant, during a presentation to the 2021 Compliance Institute South Africa (CISA) Annual Conference.
Ms Ireton was among three presenters who assessed ESG risks from a compliance perspective on day two of the conference, held virtually on 18-19 August 2021. She set about answering whether the profession was ready for “the next big global risk” before commenting that firms had no choice but to choose sustainability, or risk being left behind.
“Climate change is a systemic risk that we need to manage… which explains the volume of climate policy and regulation on the way globally and locally,” said Lizet Steyn, head: climate risk at Nedbank, who was tasked with unpacking the interplay between climate risks and sustainable finance. For banks, sustainable finance requires reflecting on operational footprints as well as reviewing both investing and lending activities. But for South Africa, the sustainability challenge centres on reducing carbon emissions across a range of carbon-intensive industries, while taking the country’s alarming poverty and inequality statistics into consideration. Ms Steyn pointed out that one of the key sustainable finance focuses was for business strategy to align to frameworks such as the Paris Agreement and the United Nations’ Sustainable Development Goals (SDGs).
Alex Russell, chief risk officer at Sasol Limited, is better placed than most to comment on the role of compliance officers and executive teams in the battle against climate change and other sustainability challenges. A self-proclaimed sustainability evangelist, she commented that companies were being asked to consider a wide range of environmental and social issues in running their businesses sustainably: “Sustainability is a win-win; it creates drivers for the business as well solving more pressing [environmental and social] needs.”
Sasol, which has come in for plenty of criticism for its carbon footprint, among other environmental concerns, learned early on to move beyond reactionary, environment-focused compliance towards a more proactive, strategic approach to ESG.
It was refreshing for a risk professional to confirm what so many investment managers have said in the past few years, namely that running a business through an ESG lens results in better financial outcomes. All presenters were in agreement that a strategic approach to ESG enabled firms to improve their margins while addressing real social issues.
“This is no longer about your ESG or financial response [in isolation]; but about understanding how your company is located in the society from which it operates and to which it is connected,” Ms Russell said, offering the tangible example of a 10% reduction in toxic chemical emissions at one of the group’s divisions resulting in an immediate $34m increase in market value, as well as significant operational benefits.
Compliance and risk management teams have plenty of frameworks on which to base their ESG approaches, with the SDGs and associated global compact for reporting being an obvious starting point. This and other frameworks offer tangible examples of how corporate thinking needs to change to sell sustainability and create a useable entry point for c-suite discussions. According to Ms Russell, Sasol’s journey towards a fit-for-purpose corporate ESG framework started by considering what should be optimally included in an integrated annual report. This assessment resulted in a four-step process, briefly described below.
Step one was to identify the six capitals that the company used and reflect on the interdependencies and trade-offs between those capitals. The second step was to consider the organisation’s capacity to respond to key stakeholders’ needs and demands. “We could then map where the organisation would draw a line in the sand,” said Ms Russell, explaining step three.
The fourth and final step was to start adapting strategy by identifying risks and threats and turning them into sustainable business opportunities for the future. For Sasol, this process required dealing with its large carbon footprint by considering hydrogen, as one example, for a greener future and a sustainable business to 2050 and beyond.
The real question in the sustainability debate is whether firms should act proactively to implement the necessary change or wait for the regulators or society to bring out a heavy stick to force them to do so. Companies that take the latter path may be out of business before they get the opportunity to reform.
There was some useful information for compliance officers and risk managers. “You need to be agile, you need to have a different set of skills and you need to stop relying on the law and rather focus on understanding the language and taxonomy of the ESG field,” Ms Russell concluded. “You must consider the credibility aspects and disclosure developments that are coming down on us [as well as] the materiality aspects and how these differ from an integrated reporting approach [compared to] the TCFD reporting approach.” The latter requires that you consider views of stakeholders external to the company.
Ms Steyn, meanwhile, concluded with a quote shared by then US President Barack Obama during a 23 September 2014 UN Climate Change Summit: “We are the first generation to feel the impact of climate change and the last generation that can do something about it.” Makes you think, does it not?