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  • 24 The Sustainability Yearbook 2020

  • 25The Sustainability Yearbook 2020

    Distant Threats, Present Dangers, and Current Controversies – Exploring the Connection Between Early Risk Perceptions, Risk Management, and Risk Avoidance While most businesses are usually good at defining and managing material risks – those that pose clear and present danger – the identification of new and emerging risks is still underdeveloped.

  • 26 The Sustainability Yearbook 202024 • SAM • The Sustainability Yearbook 2020

    In September 2018, Facebook admitted that an attack on its computer network had exposed the personal data of more than 50 million users – one of the largest data security breaches in history. Just one year earlier Facebook was embroiled in yet another landmark data privacy scandal involving unauthorized access to user data and an attempt to influence voters in the 2016 US presidential election. Facebook has paid billions in connection with both cases and continues to suffer reputational damages from reduced stakeholder trust.

    Meanwhile, 3M Company, a US-based industrial conglomerate, faces an increasing number of legal suits related to its use of PFAS,1 toxic chemical substances widely considered harmful to human health. In February 2018, 3M settled with the state of Minnesota for US $850 million over PFAS-related pollution and expected liabilities could reach over US $5 billion.

    The severity of the financial and reputational damage suffered by Facebook and 3M casts a spot- light on weaknesses in the links of many companies’ risk management processes. The magni- tude of the damages (not only to companies but also to society and the environment) led us to ponder how cases like these can arise and, more importantly, how they can be avoided.

    Isabelle Stauffer

    Senior Manager,

    ESG Ratings

    Annelies Poolman

    Client Manager,

    ESG Benchmarking

    Introduction While most businesses are usually good at defining

    and managing material risks – those that pose clear

    and present danger – the identification of new and

    emerging risks is still underdeveloped. Emerging risks

    are uncertain and difficult to quantify and so represent

    large unknowns to companies. Given these constraints,

    they have been omitted from traditional risk reporting

    and financial disclosures to investors. With sustainability

    themed risks on the rise – often embedded in complex

    long-term developments and externalities – there is

    growing demand from investors that companies identify

    emerging risks early on and transparently communicate

    on these topics as part of a more holistic risk manage-

    ment approach.

    We posit that companies which have a comprehensive

    risk management process in place that emphasizes

    the early identification of distant threats, are better

    positioned to adapt and respond to changes on the

    external risk landscape when those risks develop into

    clear, near, and present dangers.

    Using data from the SAM Corporate Sustainability

    Assessment (CSA),2 we analyzed the risk reporting

    sequences of companies over the past 5 years (2015-

    2019) for two key risk areas – 1) climate change and 2)

    data security & privacy – to test whether companies

    that first identified emerging risks and then managed

    it as a material issue were able to avoid or mitigate

    later controversies and damages.

    1 PFAS, short for per- and polyfluoroalkyl substances, a group

    of chemicals that the US Environmental Protection Agency

    has ruled adverse to human health.

    2 A total of 2,974 companies within the CSA were assessed for this study.

    Lead ESG Benchmarking Specialist

    Senior Manager ESG Research

    Annelies Poolman

    Lead ESG Benchmarking Specialist S&P Global

    Isabelle Stauffer

    Senior Manager ESG Research S&P Global

  • 27The Sustainability Yearbook 2020The Sustainability Yearbook 2020 • SAM • 25

    With sustainability themed risks on the rise – often embedded in complex long-term developments and externalities – there is growing demand from inves- tors that companies identify emerging risks early on.

    Risk Definitions & Descriptions

    Emerging Risks – Since 2015 the Corporate Sustainability Assessment (CSA) has asked companies to indicate significant

    emerging risks. The CSA defines emerging risks as newly identified areas of potential risk whose impact is unlikely to be

    felt in the coming three to five years. Emerging risks often reflect uncertain outcomes of upcoming political decisions,

    legislation changes, or market dynamics that might shape the future competitive landscape for companies. Generally,

    these risks are not properly accounted for in the company’s current financial statements.

    Material Issues – Since 2012, the CSA has asked companies whether they have conducted a materiality analysis

    whereby they identify their most important material issues which will impact their ability to generate long-term value.

    Material issues are defined as a sustainability factor that can have a present or future impact on the company’s value

    drivers, competitive position, and long-term shareholder value creation.

    Companies should manage material sustainability issues by defining a business case, implementing management stra-

    tegies, setting targets, developing progress indicators, and linking targets to performance incentives (e.g. executive

    compensation). Moreover, as soon as a risk is defined as a material issue it loses its “emerging risk” status.

    Controversial issues – Controversial issues are realized risks that result in financial and reputational damage for com-

    panies. Our analysis of company controversies is carried out through a Media and Stakeholder Analysis (MSA).3 The

    MSA process is used to identify controversies and damages that are linked to poor corporate policies, structures, and

    practice on a range of sustainability issues.

    3 Analyses of controversies are carried out through the CSA Media and Stakeholder Ana- lysis (MSA). An MSA case is created if a company has been involved in a specific negative event related to the company’s material sustainability factors. The MSA methodology can be found at https://www.robecosam.com/csa/csa-resources/csa-methodology.html

    Figure 1: The reporting sequence within a comprehensive risk management process

    Source: RobecoSAM

    Identification of emerging risks

    Managing material issues

    Avoiding and mitigating controversial issues

    • Emerging risks are characterized as known, distant threats that may cause damage to a company in the long term.

    • Emerging risks are not always fully quantifiable, may

    contain a high degree of uncertainty, and are unlikely to have any significant impact on the company’s operations or profitability in the short to medium term.

    • Over time many emerging risks will develop into material issues that pose significant danger to growth and profitability.

    • Companies should manage material sustainability issues by understanding the business context and impacts of these issues and implement correspon- ding management strategies including: setting targets and developing KPIs linked to performance incentives.

    • Successful management of risk should be evident by the absence of risk events.

    • Companies that follow a comprehensive risk management and reporting sequence should reduce the probability of controversies/ events.

    • The impact of adverse risk events (if experienced) should be minimal.

  • 28 The Sustainability Yearbook 202026 • SAM • The Sustainability Yearbook 2020

    Over the past five years a significant number of companies have reported on climate- related issues as emerging risks citing un- certainty around changing environmental regulations, potential water shortages, and the negative impacts of plastic packaging as potential risk factors.

    4 “Climate Strategy” alone is not considered an emerging risk due to its material impact on most companies. How- ever, specific aspects of “Climate Strategy” are considered emerging

    risks, depending on the industry and the region in which the company and its operations are located.

    5 A number of companies have been incorrectly re-

    porting current material risks as emerging risks. Such cases were exclud-

    ed from consideration in this analysis.

    Climate Strategy – a growing corporate concern Over the past five years a significant number of

    companies have reported on climate-related issues

    and identified specific aspects of climate strategy

    as emerging risks.4 Uncertainty around changing

    environmental regulations, potential water shortages,

    and the negative impacts of plastic packaging have all

    been cited as potential risk factors that could influence

    companies and industries in the future.

    Climate Strategy – frequency of reporting

    as an emerging risk

    Over the last five years, 33.15% of all correctly identified

    and reported emerging risks5 have been related to

    Climate Strategy. Over the same time period, compa-

    nies from 51 out of 61 industries have reported

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