Steering sustainability into governance: a how-to guide

But does the governance structure in companies already take this into account? If not, how can these topics be successfully integrated into companies’ internal structures and processes? Do ESG risks need to be fully integrated in company-wide control and monitoring systems? How will sustainability change reporting? And, above all, who in the company will steer the transition towards sustainability?

Integrating sustainability in business practice

In practice, there is an array of challenges that complicate the integration of sustainability issues and ESG risks into governance and reporting.

For instance, sustainability can be affected by strong cultural differences. Topics like nuclear energy and the use of herbicides, for example, will weigh differently depending on how a society views their overall impact – and those views can change rapidly.

Political actors are also increasingly pushing (but to different degrees around the world) for businesses to understand and monitor the sustainability impact of their own companies and integrate it into company-wide risk management systems.

Alongside ESG considerations, other factors that take centre stage when it comes to sustainability are the corporate culture, internal responsibilities and the control (governance) rights of an organization.

Putting sustainability at the heart of corporate strategies

Some corporate and sustainability strategies still exist in parallel, when it is increasingly evident that sustainability action has to directly support the strategic goals of a company. It is therefore important to combine strategic business objectives and sustainability within the scope of a sustainable corporate strategy. Take sales for example: the transactions a company decides to make (and not make) needs to be determined through a sustainability lens. If a corporate strategy ignores sustainability in the name of making a sale – whatever the cost – then the company cannot claim to be acting sustainably.

Understanding sustainability

Many companies examine non-financial risks in less detail from the outset, as they have little knowledge or experience of their quantitative assessment. Alongside these difficulties, the long period of time needed to accurately assess these risks is another common stumbling block for integrated risk management.

For many companies, the target audience for risk management is another challenge: in most cases there is not yet a fully developed management system for ESG risks that addresses both internal and external stakeholders.

Due to this, many companies handle risk management and sustainability management separately. This is clearly evident in risk reports in which sustainability risks are listed as ‘other risks’ or ‘reputational risks.’ This does not do justice to their strategic importance.

To overcome this, leaders who want to do better on risk should consider stakeholder management, which although barely used for risk management, is capable of identifying relevant developments.

Immediate and far-reaching effects of integrating sustainability

The use of ‘sustainability’ to describe a wide range of activities without any direct or obvious relevance to corporate risk management, such as corporate citizenship, environmental projects or PR campaigns, also negatively impacts the acceptance of sustainability topics as part of risk management and governance.

A cultural transformation is necessary to enable the genuine integration of sustainability risks into ERM (enterprise risk management) systems. Only the integrated assessment of all risk types allows relevant information to be processed, which in turn can be used as the basis for important decisions.

Although the objective is not to integrate all aspects of sustainability management into risk management, leaders may find it useful to incorporate certain elements that are particularly relevant to their fields.

Act now – utilize opportunities sustainably

There is no strictly ‘right’ or ‘wrong’ way to handle sustainability risks, as every situation has to be assessed according to the local context. However, what remains universal is the need for companies to have reliable and integrated systems to enable managers to make smart decisions.

It is time for companies of all sizes to integrate the topic of sustainability into their governance processes. Even today, numerous regulatory initiatives indicate that, alongside the increasing pressure from the capital market and the general public, further regulations are likely, and sustainability requirements will become stricter. For instance: EU plans to review the Non-Financial Reporting Directive; Germany’s interest in legislating what are currently voluntary sustainability standards, and the EU looking at mandating human rights due diligence.

To be on the right side of the market, companies need to act responsibly with regard to their own sustainability risks and those arising from their supply and value creation chains.

Leaders who want to take advantage of the opportunities associated with the integration of sustainability should begin the sustainable transformation of their companies immediately and implement governance solutions required for this, such as an integrated risk management system.