Integrating ESG into risk management
IN BRIEF: Integrating environmental, social, and governance (ESG) into risk management is not just a moral imperative but a strategic necessity.As companies are increasingly required to outline their ESG policies and positions, it is crucial to evaluate how these commitments are being assessed and judged.There is a growing consensus that sustainability risk is also a financial risk, and corporate strategies need to reflect this broader perspective. PULL QUOTE: "By integrating ESG principles into risk management, companies can safeguard their operations against climate-related risks and promote inclusive growth, driving real and positive change." Integrating environmental, social, and governance (ESG) into risk management is not just a moral imperative but a strategic necessity. As businesses navigate a landscape where ESG considerations significantly impact operations and reputation, integrating ESG into risk management becomes crucial. This article explores how companies can integrate ESG into risk management to build resilient, sustainable, and ethically grounded business practices.The crucial role of ESG in risk managementAs companies are increasingly required to outline their ESG policies and positions, it is crucial to evaluate how these commitments are being assessed and judged. Most companies release an annual ESG report, which customers and other key stakeholders review to ensure alignment with their values, and which investors use to support their investment decisions. Companies that pursue management system certification (e.g., ISO Management Standards, Environmental and Energy certifications, etc.) can integrate ESG goals from the initial planning stage of the PDCA (Plan-Do-Check-Act) cycle. The check phase allows them to evaluate the effectiveness of their policies and processes in meeting their commitments and take appropriate actions. This approach also helps proactively address potential risks, build resilience against ESG-related shocks, and comply with regulatory requirements. Enhancing existing risk management practices is vital because negative ESG incidents are increasingly damaging and costly. Research by international ratings firm Morningstar Sustainalytics indicates that companies experiencing significant ESG incidents lost an average of 6% of their market capitalization. Additionally, incorporating ESG into risk management is not just about avoiding negative outcomes; it also involves seizing opportunities to create value and drive innovation. Companies that effectively manage their ESG risks are well-positioned to succeed in a rapidly changing global business environment.According to the 2025 Asia Pacific Risk in Focus study, a survey conducted by the Institute of Internal Auditors, organizations consider climate change or environmental risk to be in their top ten risk expectations this year but consider it to be in their top five in the next three years, highlighting its increasing significance and the need to address it sooner than later. Companies with effective ESG practices are less likely to encounter harmful controversies and are better equipped to respond when incidents occur. Medium and smaller firms may not face the same level of stakeholder scrutiny or regulatory requirements, but they are equally at risk from ESG incidents, which can be even more damaging. Without the support of major investors, smaller companies may struggle to recover from adverse events. In essence, ESG risk is a material risk, and failing to address it promptly and appropriately can lead to severe consequences.Integrating ESG principles in the ERM processAccording to the 2023 EY Global Board Risk Survey, highly resilient boards are more aware of the potential of ESG governance to create long term value as well as more aware of the sustainability risks their organization may face. Integrating ESG factors into enterprise risk management (ERM) process is crucial for enhancing executive management’s understanding of risk, encouraging a collaborative relationship with risk owners and risk management units, ensuring regulatory compliance, protecting reputation, mitigating risks, and ensuring long-term sustainability.Boards can accomplish this by incorporating ESG risk assessments into regular risk identification processes and exploring how climate change impacts the business model. Companies should adopt a comprehensive approach encompassing internal and external factors, identifying financially material ESG risk exposures through a materiality assessment. In addition, create strategies to mitigate any identified ESG risks, and regularly monitor these and report progress to stakeholders. The current regulatory landscape In recent years, government regulators have introduced various ESG-related regulations, primarily focusing on reporting and disclosure requirements. However, laws and regulations that mandate a more proactive approach towards ESG were deemed essential. Two significant steps in this direction are the Extended Producer Responsibility (EPR) Act of 2022 and the proposed Local Carbon Economy Law.The EPR Act of 2022 addresses the Philippines' plastic pollution problem by requiring large enterprises to establish programs for the effective recovery of plastic waste. Companies must meet target recovery rates, starting at 40% in 2024 and increasing by 10% annually until 2028. This act aims to ensure that producers take responsibility for the entire lifecycle of their products, particularly in managing post-consumer waste.The proposed Local Carbon Economy Law seeks to create a framework for reducing carbon emissions at the local level, promoting sustainable practices, and encouraging the development of a low-carbon economy. This law aims to align local initiatives with national and international climate goals, fostering a more sustainable and resilient economy.Over the years, the Philippines has made significant strides in promoting ESG practices. In 2019, the Securities and Exchange Commission (SEC) issued Memorandum Circular No. 04, requiring publicly listed companies (PLCs) to submit sustainability reports. These reports assess and manage non-financial performance across economic, environmental, and social aspects, enabling PLCs to measure and monitor their contributions towards achieving universal sustainability targets and national policies.The Philippine government is actively working to enhance its ESG regulatory framework. The country has expressed its intention to adopt the International Sustainability Standards Board (ISSB) standards, demonstrating a commitment to align with international best practices. In October 2021, the Sustainable Finance Taxonomy Guidelines (SFTG) for the Philippines were developed through cooperative efforts between the SEC, the Bangko Sentral ng Pilipinas (BSP), and the Insurance Commission (IC). These guidelines, drawing on the ASEAN Taxonomy’s Foundation Framework, initially focus on climate change mitigation and adaptation, with plans to include ecosystems, biodiversity, circular economy, and potential social objectives in future iterations. Additionally, the SEC plans to fully implement the Association of Southeast Asian Nations Sustainable and Responsible Fund Standards (ASEAN SRFS) to enhance transparency and uniformity in reporting.With climate risks looming, the business community has also increasingly integrated ESG into their operations and reporting over the past few years. Several companies in the Philippines have been recognized for leading the way in adopting ESG practices, setting examples for others to follow. To help their organizations manage ESG risks, Chief Audit Executives (CAEs) can help define the Board’s role in sustainability requirements, overseeing the processes around approving disclosure reports. Greenwashing, or the act or practice of making something appear more environmentally friendly than it actually is, poses a new kind of risk that must be incorporated into the overall risk assessment. CAEs can provide assurance for the accuracy of sustainability reporting and guard against potential greenwashing. Driving real and positive changeCompanies that prioritize ESG have been shown to have a positive correlation with financial performance and attractiveness to investors. Many business leaders recognize the importance of strong ESG governance, oversight, and accountability. There is a growing consensus that sustainability risk is also a financial risk, and corporate strategies need to reflect this broader perspective. By integrating ESG principles into risk management, companies can safeguard their operations against climate-related risks and promote inclusive growth, driving real and positive change. Joseph Ian M. Canlas is a Risk Consulting Partner and ASEAN Core Consulting Quality Leader, and Christiane Joymiel C. Say-Mendoza is a Risk Consulting Partner, both of SGV & Co.This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the authors and do not necessarily represent the views of SGV & Co.
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