Integrating ESG and ERM: A Roadmap to Business Resilience

From technological disruptions, and shifts in regulations, to climate change and evolving stakeholder requirements, today’s business landscape presents organisations with both risks and opportunities. Investing in organisational resilience has never been more urgent. As organisations strive to navigate these complexities, integrating traditional Enterprise Risk Management (ERM) with Environmental, Social, and Governance (ESG) considerations presents a strategic advantage—one that strengthens the risk management processes that support organisational resilience. According to a 2017 report from the World Business Council on Sustainable Development (WBCSD), instances of companies failing to effectively address social and environmental risks are on the rise. This synergy between ERM and ESG can not only shield businesses against emerging threats but also unlock new opportunities for long-term value creation.

The Evolving Risk Landscape

Historically, risk management approaches have primarily focused on the obvious—financial and operational risks—since these typically have immediate measurable impacts. However, with the rise of ESG-related risks, businesses now face new dimensions of risk that businesses must address to stay competitive. Supply chain disruptions, climate-related disasters, regulatory changes across global jurisdictions, social justice movements, and corporate governance failures all pose significant threats to business continuity, globally. Companies that fail to acknowledge and address these risks holistically may face not only financial losses but also reputational damage, and even avoidable legal issues.

While ERM provides a structured approach to identifying, assessing, and mitigating risks across an organisation’s operations, ESG, on the other hand, provides a framework for evaluating and addressing non-financial risks and their impact on long-term viability and sustainability. By integrating these two approaches, businesses can create a comprehensive risk management strategy that effectively addresses both traditional and emerging risks.

The Synergy Between ERM and ESG Management

Integrating ESG risks into an existing ERM framework fosters a proactive approach to risk management that enhances business resilience. This integration offers several benefits:

1. Enhanced Risk Identification and Evaluation: ESG considerations help spotlight hazards that traditional ERM frameworks might overlook, especially new and emerging risks. For instance, climate-related risks—such as extreme weather events and regulatory shifts related to greenhouse gas emissions—pose significant operational threats. A case in point is the full enforcement of regulations on Styrofoam and single-use plastic bags by the Lagos State Government, effective from January 2025. Similarly, social issues like forced or child labour and poor working conditions within supply chains can damage a company’s reputation. For example, Nike, reportedly worked with the Responsible Labour Initiative (RLI) in FY22 to deliver a post-training program on responsible recruitment to address forced labour concerns raised by NGOs and investors. Integration of ESG into existing ERM programs helps organisations to assess risks from a broader, more forward-thinking perspective.
2. Informed Strategic Decision-Making and Competitive Advantage: Businesses that embed ESG considerations into their risk management processes are better positioned to make informed, strategic decisions. This proactive approach enables companies to stay ahead of regulatory changes. It also positions them to anticipate shifts in consumer expectations and seize sustainability-related market opportunities. For instance, companies that invest in renewable energy sources and improve resource efficiency will not only mitigate climate-related risks but also reduce operating costs, positioning themselves as leaders in sustainable business practices. Alongside giving a competitive advantage in their field.
3. Regulatory Compliance and Stakeholder Confidence: Around the world, governments and regulatory bodies are tightening ESG-related regulations or creating new ones. In Nigeria, for example, the Financial Reporting Council of Nigeria (FRCN) has adopted the IFRS Sustainability Disclosure Standards and has been working with different stakeholders to improve the readiness of companies. Companies that integrate ESG considerations in their ERM frameworks can ensure cost-effective compliance with evolving regulations, avoiding potential penalties or operational disruptions. All these build confidence with investors, communities, customers, and other stakeholders who are inclined towards businesses that prioritize sustainability.
4. Resilient Supply Chains: Recent global events—such as the COVID-19 pandemic, climate-related disasters, and geopolitical tensions—have underscored the vulnerabilities in supply chains. ESG-inclusive risk management helps companies identify peculiar vulnerabilities in their supply chains to adopt support sustainable procurement practices. By evaluating suppliers’ environmental, social, and governance practices, businesses can significantly reduce the risk of disruptions while promoting responsible and sustainable procurement practices.
5. Financial Performance and Long-Term Value Creation: Beyond the direct benefits of ESG-inclusive enterprise risk management, a proactive approach can boost long-term financial performance. Incorporating broader ESG issues into an organisation’s strategy, risk management, and governance enhances agility in changing market conditions. In addition to mitigating potential financial losses, integrating ERM with ESG opens opportunities to innovate around value-creation models. As institutional investors and limited partners increasingly prioritise robust ESG performance, organisations that address environmental, social, and governance risks and opportunities are better positioned to attract finance from sustainability-focused investors and financial partners.

Implementing ERM-ESG Integration

Recognizing the challenges of integrating ESG risks into existing ERM frameworks, the WBCSD partnered with the Committee of Sponsoring Organisations (COSO) to publish a guide on applying ERM to ESG-related risks.

To successfully integrate ERM and ESG, businesses must adopt a structured approach that aligns with their overall risk management framework. Key steps include:

1. Governance and culture: Senior leadership and board members play a critical role in shaping the company’s ESG-related requirements and embedding sustainability into its culture.  They must establish clear governance frameworks, assign ESG responsibilities, and create opportunities for inter-departmental collaboration.
2. Strategy and objective-setting: The leaders responsible for governance and strategy must assess the impacts and interdependencies of all business activities on society and nature. Organisational insights related to ESG issues should be leveraged when developing strategies and setting business objectives. It is essential that the knowledge of the organisational context, as it relates to ESG issues, are applied in the development of strategy, and the setting of overall business objectives. Conducting materiality assessments and scenario analyses also help companies understand how environmental and social risks affect value creation.
3. Performance for ESG-related risks: This refers to how management addresses ESG-related risks. It follows the traditional risk management process; risk identification, risk assessment and prioritisation, and the implementation of risk responses.
4. Review and revision: A continuous review of ERM activities is essential for evaluating the effectiveness of risk management strategies. Insights from the organisation should be used to develop performance indicators that signal when adjustments are needed in identifying, assessing, and responding to risks in an agile fashion. Internal and external stakeholders must be engaged in the process.
5. Information, communication, and reporting: Effective channels for communicating ESG-related information to internal and external stakeholders must be established. Internal communication should support strategic and operational decision-making, while external communications should equip stakeholders with insights necessary for their own decision-making processes. Transparent reporting fosters trust across all parties.

Conclusion

The future of business resilience depends on the seamless integration of ERM and ESG. Organisations that embrace this holistic approach will not only mitigate emerging threats but also unlock new opportunities for growth and innovation. By proactively addressing ESG risks, companies can strengthen regulatory compliance, enhance stakeholder trust, and drive long-term financial performance and sustainability. As the business environment evolves, embedding ESG risks within traditional ERM will be a defining factor in building resilient future-ready businesses.

Authors:

Elizabeth Ocheibi, Lead, Sustainability Services & Rukayat Alli-Oluwafuyi, Senior, Sustainability Services