Using ESG to support long-term risk management

ESG (Environmental, Social, Governance) no longer lives on the periphery of business; it’s front and center for executives and stakeholders, and ESG principles are at the core of business values and operations. The concept of resiliency has gained traction in the last two years, particularly in response to the COVID-19 pandemic. In the inaugural episode of the ESG Experience, Helee Lev, Goby’s Chief Revenue Officer, and Ryan Nelson, Goby’s Chief Executive Officer, discuss integrating ESG into your risk management process.

Topics covered in this episode include:

• Using ESG as a lens to integrate into risk management processes
• Applying enterprise risk management strategies to ESG-related risks
• Aligning risk management strategies with ESG
• Key components of ESG-focused risk management frameworks
• And more

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Read the transcript of this episode below:

Helee Lev: Hello, and welcome to ESG Experience, the podcast brought to you by Goby, the ESG platform. I am Helee Lev, CRO at Goby.

Ryan Nelson: And I am Ryan Nelson, CEO, and we’re your hosts for this podcast.

Helee: Whether you’re an ESG expert or just dipping your toes into the ESG universe to understand how it could help with engaging stakeholders, mitigating risks and attracting investors, this podcast is for you. Together, we will navigate the alphabet soup of ESG, discuss ideas, review strategies and share industry news and trends.

Ryan: Thank you, Helee, and I’m really looking forward to this. It’s important, it’s relevant and we’ve got a great series lined up. In this first episode of ESG Experience, we’ll be discussing how to integrate ESG environmental, social and governance, of course, into your organization in an effective way so that it’s meaningful. A way that we’re going to talk about doing that is through ERM or Enterprise Risk Management, something that a lot of organizations already have as a sub-committee or a category or a regular agenda item so ESG via ERM.

Helee: And that’s really in line with the trends that I’ve personally been seeing today after more than a decade in this space is that ESG is no longer a cute, little green team over there or sustainability off to the side. It's a voluntary committee that meets once a month. It really is front and center and using it as a lens to ERM which is also front and center to the vitality and strategy of your business is important. And a couple of examples from a KPMG report recently of these types of questions being posed by investors, let me read off a couple.

Ryan: Yes.

Helee: “Is the board equipped and presented with the right information to adequately evaluate and oversee the ESG aspects of the company’s strategy?” So this is bringing ESG right to the boardroom. Again, it’s not off to the side, it’s not an extraneous thing that’s happening, it’s front and center in the boardroom. “Has the company identified and assessed all ESG-related risks and issues that are material to the business?” So again, bringing ESG front and center as something that is meaningful and material to the actual business. “Are there clear ownership and accountability assigned within the company to oversee material ESG issues?” So again, giving ESG teeth. It's not just a team that’s putting forward some random initiatives. There needs to be ownership, accountability and measurement. “Are ESG drivers incorporated into the company’s performance evaluation and management?” So again, a bit more teeth. “Is the company’s reporting transparent to clearly articulate the influence of the ESG issues on strategy?” So of course, the final part of it is not just about what you’re doing and how ESG is incorporated into the day-to-day function of the business and integrated with the ERM, but how are you communicating exactly what you’re doing and being transparent.

So again, these ESG principles are core to the actual function of the business itself. It feels like they always have been, but the correlation and joining them together really feels more recent in the last 18 to 24 months. And now, it’s really front and center as a topic of conversation especially with the backdrop of the pandemic as people are now talking about resiliency as a concept and I am personally seeing it. If there’s any silver lining in the pandemic itself, it has really brought ESG concepts front and center. Only the strong and prepared will survive times like this. We are literally being put to the test.

Ryan: Yes. Well said, Helee. And the idea of successfully integrating ESG into ERM or using ERM to look at ESG-related risks. So saying that it’s not a marketing only concept ESG, but rather it’s legitimately something that the ERM or Enterprise Risk organization or components of your organization need to address. So what are the ultimate results by doing this? What should you expect if you successfully manage the ESG risks? I’m going to list some of these from that same report.

Enhanced resilience being one of them. A company's medium and long-term viability, as you just pointed out, depends on resilience and what risks that are there. A common language for articulating ESG-related risks is the next as we mature in understanding ESG. We have a common language in talking about it. An improved resource deployment is a third thing that you will achieve as you address this. Improve the resource deployment, you obtain robust information on ESG-related risks which enables management to assess the resource needs so that you’re prepared. You should achieve enhanced pursuit of ESG-related opportunities. So you’re kind of playing defense a little bit in making sure that you’re ready for things that might happen and you can be resilient, but you’re also going to find opportunities as part of this as well; ESG-related opportunities. Realize efficiencies of scale, managing ESG-related risks centrally and alongside other level risks helps you eliminate redundancies and allocate resources to address the company’s top risks. And improved disclosure.

So we talked about being resilient, knowing what resources you need to be ready, looking for opportunities, being able to scale and then, of course, disclosure. We hear about it a lot. Having to explain and have defensible material responses to stakeholders, the various stakeholders.

Helee: So that’s great and you talked about some of the objectives or benefits that you’re going to see by implementing these practices either into your company via ERM or integrated with ERM or otherwise. I recently listened to a webinar where you also don’t know the opportunity cost of not doing it, right? So this one investor was talking about a deal that they were evaluating, things were looking good, it was progressing. I think they were in the final phases of due diligence and something came back within due diligence was an ESG-related item, but one that they felt might have material financial impact down the road. So by not addressing that, by not getting ahead of that as a risk, not only could it be a risk to the vitality of their business, but it was a deterrent for this investor and I think she did say that the deal fell apart. So again, you don’t know what you’re missing by not taking ESG seriously in addition to the benefits that you’ll see if you do.

So say that you’re on board, say that in about 6 minutes and 41 seconds, Ryan and I have convinced you that ESG must be an imperative part of your ERM and of the way that you run your company. So let me talk through a couple steps to align ESG and Enterprise Risk Management.

Now, the benefit of doing this is you’re already going to have the correct audience, you’re going to have the right stakeholders in the room, the committees are going to be assembled so you’re just expanding the topics and then hopefully you have the framework already in place to integrate these concepts into an existing framework with an existing audience. So just again, change management is hard and this helps with the fact that it’s not necessarily a full-blown process change or large change management initiative, you’re just expanding the scope of your ERM.

So step one, identify the full spectrum of your company's risks. So you’re already sitting there and thinking about, “What are risks to my business?” A pandemic, a flood, the total collapse of the real estate market commercial office, you know just in theory. So then include the ESG concerns as well. Use ESG risk identification methods to comprehensively identify both established and emerging risks.

Step two, align on priority ESG issues for inclusion in ERM and modify your ERM inventory accordingly. So again, just incorporate these things. If you’re running a gap assessment anyway of your investment risk inventory, translate specific emerging and existing material issues across priority ESG issues and existing ERM issues.

Step three, evaluate the relevant risks for likelihood, vulnerability and impact. So again, use high-level risk assessments that consider less conventional criteria such as impacts on reputation, speed of onset, persistence, an ability to mitigate, help enhance understanding of difficult to measure sustainability risks. So again, what this is saying is just apply the same risk assessment to the conventional business risks that you have also to the ones that you have identified, the expanded set with regards to ESG. And then maintain an ongoing ERM and materiality alignment.

So the key is to keep doing it, right? So it’s not a one and done. It's a consistent practice and it’s an ever-evolving process. And again, once the ESG concepts are incorporated through your ERM practice, essentially, you have the framework and you’re good to go.

Ryan: And to just take a step back for a minute. If, again, you’re not convinced that that’s our point, I'm not sure that’s your point, but companies today face an unprecedented set of risks as stakeholders demand accountability and transparency in how corporations approach things such as the environment, how they attend to the wellbeing of their workers, their customers, their neighbors and if they govern themselves in an ethical way.

I think that’s anecdotally true. People understand it, you feel it, the data is there to support it. The risks or the pressure that stakeholders, not company shareholders only, all of the stakeholders of an organization which can be quite expansive. Again, the community, the neighbors, these types of things, they’re really holding people accountable and have high demands. So it just needs to become an integrated part of your organization. The company that ignores these could be committing a major misstep and incur significant economic costs. If you need to tie it back to economic value, it could be significant.

Helee: And I think this is again just brought to light during the circumstances of 2020 and the pandemic. This is no longer like a nice to have, ESG is a good thing, it’s a nice thing to do. If you’re not worried about the wellbeing of your workers, if you’re not worried about the vitality and the wellbeing of your customers, your neighbors and if you are not really incorporating these practices not just in a binder in a cabinet, but in your day-to-day business, like I said before, the strong are going to prevail and survive and the weak are not. And this has really put us all to the test.

Ryan: So one way that investors can identify and manage the ESG-related risks in their portfolios is to understand how companies sustain competitive advantages or their economic moats which I think is a great term. If you’re not familiar with it, a competitive advantage or an economic moat. What is the impact on those risks? So which environmental, social and governance issues are financially material for each company or industry. So you’ll hear quite a bit, the words, “financial” and the words “material.” So of course, we want to be prioritized and find out what’s material and find your way through the noise. How are companies tackling these material risks and how these risks affect long-term value? So it is quite interesting because it’s do what’s appropriate and if you do what’s appropriate, you should expect better financial performance and improved material impact.

Helee: And I think this is the exciting thing that I've seen. The exciting maturity within this industry is that, of course, once a concept is tied to financial materiality or tied back to company’s performance, it’s going to get taken seriously. And as I said earlier, I've really seen that maturity of ESG and sustainability. And when I say sustainability of yesteryear really focused on the “E,” the environmental, energy, water, waste, carbon being off to the side, a nice to have, not a need to have, it’s completely flipped on its head. It's a need to have now. It's not a nice to have and it’s not just about the “E.” It’s also just as much about the social and governance issues as well that are going to predict how financially viable a company is and we now do have ways to kind of tie that back to the actual impact on the company so good stuff. All right.

So Ryan, provocative question for you. You’re a CEO of a company. And if you look at the pandemic this year and the effect that it has had on our customers who are primarily real estate owners across all asset classes and the impact it has just had on the market even thus far. And I don’t know that I personally believe we’re at the bottom yet as I look out at our downtown Chicago office that’s empty in the spot, these couple blocks in the city, things boarded up, things that I never thought in my lifetime I would see, right? Just almost, you could see the tumbleweed bouncing down LaSalle Street is what I tell people. So how are you feeling? Do you feel that you were prepared from a standpoint of resiliency and ESG and thinking about your neighbors and your customers and the wellbeing of your workers? So like I said, provocative, but tends to be my nature.

Ryan: Yeah. Well, a couple things there. I think that our organization, fortunately, the individuals that make up our company had it in them as a core vein or have demonstrated resiliency. And that for us as a company, we’ve done well. We have responded well and I am extremely proud of the way we’ve responded. As far as being part of the industry of commercial real estate is one of the asset classes of investment management where we focus, I'm proud to be part of. It's a challenging time for commercial real estate right now. I’ll tell you in a second why I think they’re going to recover just fine, but I'm proud to be part of it.

It's almost like the question we were talking about earlier. It's an incredible time, this pandemic. Would you want to be living through it? Well, not necessarily, but it’s interesting to be part of something that is so impactful and is rare, but impactful. So it’s interesting to be a part of it and I am, I guess, proud to be engaged in it and just on this journey with commercial real estate owners, operators, investors, our customers. So if it’s going to happen and someone has to deal with it, I’m glad that Goby is a part of it and can try and help.

As far as how commercial real estate is going to respond, this is when people innovate. They really do. So I'm really excited to see the innovation that’s going to come out of a challenge like this and what CRE is going to do and respond and what it’s going to look like in the coming decade frankly because of what we’ve experienced and the journey that we’re on.

Helee: That makes sense. Well, from your mouth to the ears of the heavens, we’ll hope. So we talked a lot about today the lens of ESG when looking at ERM. I want to break down a little bit more the specific E, S and G if you’re thinking about that as a lens.

So under the “E,” the environmental, companies build economic moats. So again, thinking of a castle with a moat dug around it that protects it. It is a good visual analogy by managing risks. So a lot of investors are focused on environmental risks that might impact companies. So if you think about the financial risks associated with environmental impact by debate over carbon pricing, how that would affect businesses. Climate change protests, you hear things whether you subscribe and believe or not that cities like Miami and Bangladesh could be under water in our lifetime, what does that do to the businesses there? Environmental disasters like the oil spill, the BP oil spill, Deepwater Horizon rig in 2010 and then another example is the role of PG&E in California's recent wildfire. So a lot of environmental factors that could have a real material impact on business.

With regards to social, I like this summary, “Earning the public’s trust or losing it,” right? So there’s a ton of different social risks that can come with regards to a company and what they do and their behavior. Whether it’s to their own employees, their human capital, whether it’s to human rights of the human race and developing nation and I think people are all over this stuff. It could have a very positive impact on what you’re doing as a company and I think, again, the public eye is very scrutinizing on this one in particular. Or it could have a very damaging effect which could damage a company’s reputation in one fell swoop depending on what they’re doing.

And then governance. So the sound bite or the summary here, “A lax culture destroys an economic moat.” So a lot of investors have a sense of good governance practices, but it’s difficult for them to identify where and how best practices might have an impact on business performance. So things like risk management, internal audit, protocols, procedures, these are all going to be telling of companies especially during challenging times on how they’re going to survive in the long run.

Ryan: So for Goby, we really have the lens or the point of view or the audience of investment managers. And to hone in on that a little bit, we could be talking about VC or REITs or private equity, those types of organizations who oversee and manage assets. So it’s a little bit of a unique thing because we’re not talking about just how to analyze ESG for one individual company or organization, you’ve got your corporate component, but then you’ve got all these companies that you might own. You've got all these commercial real estate assets that you might own. So each of these things are their own thing that make up your ESG story. So for us, that’s who we’re speaking to and it makes it a little bit more complex. But regardless, the recap here is that you should really think about incorporating ESG into your organization, not as an aside or the green team per se, but ERM or Enterprise Risk Management is an excellent place to formally put ESG and bring it in as a foundation of your organization.

And that brings us to the final thing we’re going to do today to lighten the mood just a little bit. A feature that we’re going to roll out here that I'm excited for, it’s called, “Barley or Beans,” “Barley or Beans.” The idea is I'm going to tell you, Helee, about something that’s either a brewery or it’s a coffeehouse, if you will. They either make coffee or they make beer.

Helee: Are either of things open though? They’re not even open.

Ryan: You can...

Helee: Are they still relevant?

Ryan: Pop in, get something from either of those retail locations and take them to go, in most cases. You can get beers and you can get coffee, but I appreciate your position. So all you have to do is guess is this barley or beans, Mill Street.

Helee: Mm, I’m going to go barley.

Ryan: You’re correct.

Helee: Yes!

Ryan: It’s barley.

Ryan: Mill Street is in Ontario. We've got a lot of great customers up there so that is why it inspired me and I've actually had their beer before. And they’re known for the first organic lager. That's what they’re known for. They made the first organic lager. They claimed to be doing that for a long time since 2002 before organic beer was a thing so appreciate Mill Street Brewery in Ontario.

Helee: Excellent. Should I ever be allowed to leave my home or the state of Illinois ever again, I will head up north and check it out. Thank you for joining us today for the inaugural episode of ESG Experience. And in our next show, we’re going to talk about the new political regime in the U.S. and how it might affect the ESG landscape with a special guest. We appreciate you listening and if you want to continue the ESG conversation between episodes, please follow us on your favorite social media channel at #esgexperience. Thank you.