Risk Prediction: Climate Risk Management Beyond Compliance

August 2nd, 2023 Hannah Tichansky Reading Time: 5 minutes
Climate change landscapes

Diving into the E of ESG

The E in ESG stands for environment, and companies, consumers, and regulators are focusing on how their actions affect climate change and are making changes to their third-party risk management (TPRM) programs to address these initiatives. Many major companies are committed to making proactive changes and planning for zero net emissions in the decades to come. Governments are also paying attention; the EU, for example, is aiming to be carbon neutral by 2050 with zero net emissions.

With this increased focus on how our actions affect the planet, companies are tasked with creating greener, cleaner products and utilizing processes and practices that meet sustainability standards. A major factor in this shift is taking responsibility for any unsustainable practices that a company’s third parties are utilizing as they perform services and functions.

However, just checking a compliance box will no longer cut it; companies are expected to take proactive, ethical measures to eliminate harmful practices within their operations, and within the activities of their supply chains and third parties.

Climate Risk Compliance Demands Attention

Now, more than ever it is important for companies to monitor and manage climate change-related risk within their third-party risk management (TPRM) programs. This level of responsibility goes all the way to the top. In a speech presented on June 28, 2021, the U.S. Securities and Exchange Commission’s (SEC) Commissioner, Allison Herren Lee, emphasized the importance of board buy-in for ESG initiatives.

“These developments place even greater responsibility on companies, and therefore boards, to integrate climate and ESG into their decision-making, risk management, compensation, and corporate transparency initiatives.”

SEC Commissioner

Not participating in ESG risk management initiatives can have serious implications. In November of 2022, Goldman Sachs Asset Management was fined by the SEC for failing to follow requirements around ESG investments. The SEC press release states, “From April 2017 until June 2018, the company failed to have any written policies and procedures for ESG research in one product, and once policies and procedures were established, it failed to follow them consistently prior to February 2020.” In settling the charges, Goldman Sachs Asset Management has agreed to pay a $4 million penalty.

The Power of Stakeholders

The way companies manage ethical practices within their operations is mattering more and more to external stakeholders, as well. Ethical consumption, a type of consumer-based activism through supporting companies with ethical practices, is on the rise. As companies become more transparent due to increased consumer focus and demand, buyers are able to pick and choose who they do business with.

Such transparency, while necessary, can also expose reputational vulnerabilities. If a company’s third party does not meet sustainability and environmental expectations of customers, regulators, or the local community, the company can face reputational damage. An example of this could be negative news coverage due to harmful environmental or human rights practices within your supply chain.

In his ESG article for EY, Justin Boehm explains,

“Beyond disclosures, financial institutions and consumers are increasing their focus on ESG matters. According to the EY Future Consumer Index, about 33% of consumers surveyed said their choices would be guided by environmental or social concerns, while over half of banks cited environmental issues and climate change as key emerging risks — up over 40% year over year.¹”

EY, “How to manage ESG risk across your third-party ecosystem”

In addition to buyers, investors are also paying more attention to ESG and there are reports that show more investors are becoming dissatisfied with the way companies disclose environmental risks (or fail to disclose them). In the wake of this, investors want a standardized approach to environmental risks and companies that don’t do this will have difficulty finding investor capital.

It’s Not Just About Checking a Compliance Box

Most important of all, ESG initiatives are designed to help make the world a safer, more sustainable place. Organizations should think beyond compliance and determine how their business practices (and, just as importantly, the business practices of their suppliers and sub-contractors) affect the world around them.

In Risk & Resilience Magazine, Aravo’s Chief Technology Officer, Eric Hensley explains the importance of looking at ESG beyond a regulatory lens:

“ESG programs are interesting from a risk point of view. It’s a business risk- a reputation risk to your business without question. But there’s an ethical component to ESG programs, and as such having strong visibility and commitment to ESG and operating an ESG program at scale can have benefits beyond just mitigating reputation risk. It benefits employee morale and benefits the perception of your business’s ethical position in the world.”

Eric Hensley, Aravo’s Chief Technology Officer

ESG-related initiatives such as reducing carbon footprints, inclusionary hiring practices, identifying and eliminating modern slavery and human trafficking within your supply chains all play a role in making the world a better place.

TPRM Best Practices for Climate Risk Management

There are multiple ways to begin to make proactive ESG changes within organizations’ TPRM programs.

Identify the scope of the ESG program:

The needs of each company are different and each has special considerations in terms of manufacturing, distribution, and supply chains. An ESG program should be structured around current risk profiles, how third parties are utilized and managed, which regulations apply, and a company’s ESG policies.

To manage climate and environmental risks as a whole, first identify vulnerabilities within each supplier. Pre-contract, examine how each supplier operates, the risks it presents to the company, and any fourth or nth parties they engage with that can affect supply chains. A short initial risk questionnaire can help expose areas of risk that you want covered by enhanced due diligence.

In terms of environmental and climate concerns, gain an understanding into suppliers’ policies and commitment to environmental matters beyond just climate change. Leveraging sustainability ratings, like those from Ecovadis and Refinitiv, and risk ratings from Supply Wisdom, can provide extra layers of intelligence to assess and score suppliers.

Perform initial and ongoing due diligence:

When it comes to onboarding new suppliers, ensure all processes are documented, and that the potential relationship is validated with ESG assessments. This is not a one-time activity and continuous due diligence should be performed utilizing inspections, assessments, and questionnaires.

Capture What Matters for Environmental Impact Reporting

Capturing accurate environmental impact assessments across multiple entities in an extended enterprise and delivering trackable and auditable compliance reporting can be tricky. Software systems designed and built to optimize reporting that captures, integrates, and delivers up-to-date environmental impact disclosures can help organizations across industries meet sustainability and reporting goals. 

Aravo’s Environmental Standards solution enables customers to deliver environmental impact reporting that addresses regulatory, financial, and investor requirements, with the right data, timing, and structure to align with disclosure standards.

Designed in anticipation of evolving customer demands to capture additional environmental impact details for suppliers, Aravo’s Environmental Standards solution helps clarify a third party’s ESG activities.

With an ability to centralize your Scope 1, 2, and 3 environmental impact assessments, Aravo helps you demonstrate compliance with regulations, deliver on key stakeholder expectations, and make ethical improvements to your programs.

Gain More Climate Risk Management Insights

Interested in learning more about how to implement climate risk and ESG activities into your TPRM program? Or, interested in getting started with Environmental Impact Reporting? Speak with one of our experts today!

Hannah Tichansky

Hannah Tichansky is the Senior Content Marketing Manager at Aravo Solutions, the market’s smartest third-party risk and resilience solutions, powered by intelligent automation. At Aravo, she manages all content and thought leadership produced for products and campaigns, and contributes as an author for articles and blog posts.

Hannah holds over 12 years of writing and marketing experience, with 6 years of specialization in the risk management, supply chain, and ESG industries. Hannah holds an MA from Monmouth University and a Certificate in Product Marketing from Cornell University.

Hannah Tichansky is the Senior Content Marketing Manager at Aravo Solutions, the market’s smartest third-party risk and resilience solutions, powered by intelligent automation. At Aravo, she manages all content and thought leadership produced for products and campaigns, and contributes as an author for articles and blog posts.

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