Draft guidance applies ERM principles to ESG risk

Recently issued supplemental draft guidance is designed to help organisations apply enterprise risk management (ERM) principles to environmental, social, and governance (ESG)-related risks.

The draft would be a supplement to the Enterprise Risk Management — Integrating With Strategy and Performance framework that was updated by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in 2017.

COSO is a group of five sponsoring organisations, including the American Institute of CPAs, that provides thought leadership on ERM, internal control, and fraud deterrence. The draft supplemental guidance was issued by COSO and the World Business Council for Sustainable Development (WBCSD).

The supplemental draft discusses:

• Methods to overcome ESG-related risk challenges, including identifying and assessing the severity of risks with uncertain financial consequences.
• Innovative responses for addressing ESG-related risks and seizing opportunities.

“As ESG-related risks are becoming more widespread, organisations need to ensure they have processes in place for identifying, assessing, and managing these complex entity-level risks and opportunities,” said COSO Chairman Paul Sobel. “As with any group of risks, integrating ESG-related risks into ERM enables organisations to realise long-term value.”

The draft guidance is intended to help organisations respond to ESG-related risks ranging from extreme weather events to product safety recalls. WBCSD CEO Peter Bakker said companies that have a strong grasp on their risks make better business decisions.

“With this work, we’re going to help drive positive change in corporate governance,” Bakker said in a news release. “Better regulation will take time, but the work we’re doing with COSO that embraces the COSO risk management framework is something that can have a massive impact.”

Comments on the draft will be accepted through 30 June and can be emailed to risk@wbcsd.org.

— Ken Tysiac (Kenneth.Tysiac@aicpa-cima.com) is an FM magazine editorial director.