 Hello and welcome to this session in which we will discuss the application of ERM enterprise risk management, which is you need to be familiar with this term. This is from the prior session into the ESG framework. Now ESG is something new. What is ESG? ESG stands for environmental, social and corporate governance. It's a framework used by investors and companies to evaluate the impact, how well the company, using its operation and practices in those three critical areas, environmental area, social area and corporate governance. Why is this important? Well, it's important for some investors. Some investors, they care about your company, you're interested in investing in your company. If you score high on environmental issues, social issues and corporate governance. Now specifically, what are these issues? We're going to discuss each one of them separately. But overall, this is why we need to learn about this because investors are interested in this and this is a new report and requirement or fairly new where investors, they want you to show them how well you are doing in terms of corporate responsibility, in terms of environment responsibility, social responsibility and corporate governance. The assumption is this, sustainable business, if you are sustainable in a sense of environmental, social and corporate governance, you offer better long term return. The assumption is if you have good environmental policy, good social policy, it signify, it signals good management, which will attract what? Attract investors, investors that are interested in your company. Now in this session, we're going to look first, explain what ESG is, each component separately. Then we're going to integrate ESG into ERM. Remember, there are five components of ERM. We're going to go ahead and integrate the ESG into the ERM. Let's go ahead and get started. Before we proceed any further, I have a public announcement about my company, farhatlectures.com. Farhat Accounting Lectures is a supplemental educational tool that's going to help you with your CPA exam preparation as well as your accounting courses. My CPA material is aligned with your CPA review course, such as Becker, Roger, Wiley, Gleam, Miles. My accounting courses are aligned with your accounting courses, broken down by chapter and topics. My resources consist of lectures, multiple choice questions, true, false questions, as well as exercises. Go ahead, start your free trial today. Let's start by looking at the environmental concept, the environmental element. It tells us how a company performs as a steward of the natural environment. Simply put, we work, we produce, we pollute. How do we look at these? How do we treat these things? How does the company use the energy? Do they try to conserve energy in their company? Do they have a policy? How do they treat waste, pollution, natural resource, conservation, treatment of animals? This criteria also evaluates any environmental risk a company might face and how the company is managing those risks. For example, oil companies, companies like British Petroleum, there's a lot of exposure to the environment, how well they are mitigating those risks. For example, companies could be affected by carbon regulations that could impact their business model. What are they doing in order to manage this environmental risk? The social, the S and social, this tells us look at the company's business relationship, business relationship with their employees, with their suppliers, with their overall community. Does it work with suppliers that hold the same value that the company claims? For example, if you care about the environment, do you also work only with suppliers that care about the environment? If you care about labor laws, do you also work with suppliers that also care about labor laws? Does the company donate a percentage of their profit to local community or encourage employee to perform volunteer work? If it does, then it's high on this social criteria. If not, then it's not. How about the working conditions? Are they safe? Are workers well compensated? And this is what you look at. Are they in compliance with something called OSHA, which is safety for workers in the US? Here we're also examining the relationship between the company and its employees, its suppliers, customers and a community where it appears. Does it take into account work-life balance? Does it care for the community in which it operates? How do we know this? Does it contribute money? Does it participate in social activities? This is how we know whether the company is socially responsible or not. The third component of the ESG is the G and this is basically how does the company police itself, corporate and governs. This pertains to the company's leadership, executive pay, audit committee, internal control and shareholders right. How does the company police itself? How do they run their own company? So investors want to know that a company uses accurate, transparent accounting method that the stockholders can examine if they want to. This way they can vote on important issues because everything is transparent. They can see what's going on in terms of revenue, in terms of corporate governance and they can base their decision based on that because the shareholders are the people that vote the people in charge. Also, they may also want assurance that the company avoids conflict of interest in the choice of the board of members and don't use political contribution to obtain any favorable treatment. What does that mean? It means when you have people at the top, they don't have a conflict of interest. They're truly working for the company for the best interest of the shareholders because the shareholder voted for them, so they don't have interest with other companies, maybe with another supplier, maybe they have their own company, maybe they have interest with a competitor. And also, we're not making political contribution to obtain unduly favorable treatment, so we want to fly straight. We want to have ethical integrity at the top. Now, what we're going to do next since we know what the ESGs are, now we're going to have, we're going to integrate ESG into the ERM. For companies, a strong ESG proposition can safeguard the company long term success. That's the assumption. In other words, if you take care of the environment, if you take care of your people and the people at the top are ethical, well, you are safeguarding the company's long term success. This is what ESG is, so good ESG performance is often indicative of discipline management and forward thinking strategy. It also aligns the company with investors who are looking to support sustainable and socially responsible endeavors. And you are appealing to those type of investors which can be crucial for long-term investments and access to capital, a case in point in Tesla. Many people invested in Tesla when Tesla was not profitable for the sole purpose of what? Of not using gas for cars, you want an alternative, they believe in that. Now, we want to ensure that ESG risks are integrated because those risk ESGs are integrated with the ERM framework, rather than treated as a separate or parallel process. What does that mean? It means we need to take a look at ESG and integrate ESG into the five components of the ERM. Don't treat ESG separately as one thing. It's part of our risk framework. This is what we want to do. So you want to align ESG risk management with the organization of an old risk management process and strategic management, align the two. And this is what we're going to do next is I'm going to show you the five ERM framework. And for each framework, show you how the company can integrate ESG into their framework, starting with the first ERM component, which is called governance in culture. Well, effective governance ensure that there are processes, structure and information in place for decision maker to identify, evaluate and manage ESG related risk appropriately. So we need to do, we need to make sure the people at the top, the people who are governing the company are integrating managing ESG as they are managing the company. Now, this is about governance. Also the culture, the culture pertain to the shared values behavior and practices within the organization that influence how it manages risk. Also, we want the culture of ESG to be part of the company. Everyone is thinking about, you know, how can we, how can we be environmentally sound in every, in every decision we make when ERM includes strong emphasis on governance and culture organization are better positioned to manage the ESG risk effectively. This proactive approach to risk management not only helps in mitigating negative impact, but also it can lead to identification of new opportunities and enhancement to the organization over all value preposition. So if we're always thinking about how can we manage ESG risk, that's going to give us more opportunities. Now, what are some examples of ESG that are related to corporate governance? Because remember, governance and culture, I'm going to break governance and culture into two components. Well, board oversight. Are board responsible for ESG oversight? They have to be responsible. We want the people at the top looking at ESG. Well, potentially through specialized committee, they have a subcommittee for ESG related risk, ensuring ESG risks are part of the overall management risk. Well, if we know that they have a committee for ESG risks, then we know the board of directors are taken ESG seriously. Policies and procedure develop clear policies that define the company's stance. Just have a policy saying, this is our position on ESG and integrate those into the corporate framework. Risk management. Assign specific people to handle ESG risks, specialized people within the ERM structure to ensure effective management. Don't leave it for haphazardly to manage this risk. Integrate ESG with your overall strategy. ESG issues should be factor into strategic planning. Every decision we make, we have to take into account the environment, the social and our corporate governance. Make sure that they are aligned. We have to have accountability and incentive. If people are making good decision about ESG risks and managing this risk, we should reward them. Also information and reporting. We need to tell everyone know, let everyone know in the company that we care about ESG implement system to report ESG risk reliably and everyone is aware of this. Also, you want people, anyone that's involved, engaged in this process, stockholder engagement, establish a process for regular dialogue with stakeholders. Stakeholders are customers, suppliers, people that work for the company. Just let's talk to them. What's their concern and how we can manage their ESG risks that they think it's a true risk. From a cultural perspective, cultivating a risk aware culture, not governance, not culture. What can we do? Leadership, the tone at the top. Leadership set a tone that emphasize the importance of ESG to the organization. Their commitment should be visible. For example, they do carry certain activities and their commitment is communicated. Everyone is aware of it through emails, through whatever means necessary. Also education and training. All level of the organization should be educated about ESG and the role that they can play in managing associated risk. Risk aware decision making, encouraging employees, every decision that they make take into account ESG risks and their daily decision to reinforce this risk aware culture. Also transparency and communication, open communication about ESG risks and how the organization is addressing them. This is to reinforce the importance of ESGs. Empowering and accountability. Also what you want to do, you want to empower people to speak up. If they see anything that's concerned to them about the environment, let's talk about it. Have an open conversation. Have clear channels for reporting those risks, those concerns. And obviously continuous improvement. A cultural value continuous improvement will be better equipped to adapt to new ESG related information or risk as they emerge. Now for example, training and awareness. This applies in old steps in ERM. So just want to let you know this. The second part of ERM or the second component is strategy and objective setting. What are we saying here? We want to integrate this process, ensure that ESG consideration are woven, are part of the fabric of the organization's strategic plan, and that the related risks are managed to pursue the organization objective. Simply put, ESG risks are part of our strategies and objective. And the assumption is this integration at the same time, ensure that ESG consideration are an intrinsic part of the long-term planning and daily operation. This way we don't ignore it. Once it's part of our strategies and objective, on a day-to-day basis, we have to be aware of it in long-term, we are taking care of. What are some examples of strategy and objective setting when it comes to ESG? Strategic alignment. Align ESG risk management with your overall strategy. This is what I just said. They have to be part right from the get go. Two, objective integration. Incorporate ESG goals, whatever those goals are to reduce our consumption of energy, 5%, integrate those goals into the company's business objective. This could mean setting specific ESG target, reducing emission, achieving social impact goals, whatever those are, raising five millions in contribution for a cause or improving corporate governance. Use scenario analysis to understand the potential of ESG risks. What if scenarios? That's what scenario planning is. What if we do this? What's the impact on ESG risks? Also, what you can do is you can set performance matrixes, like develop and use GSD performance that supports strategic objective. Try to measure. Everything gets done. Try to measure your ESG. Resource allocation. You want to allocate money. You want to allocate money in the budget. Resources. Human capital to those causes. This means you are taking it seriously. Also, communication and reporting. Communicate the importance of ESG in the context of the overall strategy to both internal people as well as the external. On a regular basis, report on ESG performance in relation to strategic objective. Always align it with the strategic objective and at the end, as we always do, review and adapt. Continuously review and adjust ESG objectives and strategies in response to ongoing monitoring and changing external condition, such as evolving regulatory environment as they change. You want to change and stakeholders expectation people, communities, they have different need and evolve over time. You want to adjust. Performance is the third component of ERM. Incorporating ESG related risks into the performance aspect involved developing a system to measure, monitor and manage the performance of organization in relation to its ESG objective. So you want to basically, when we say performance, it means you are monitoring something. You are measuring something. Require the establishment of a robust framework that not only tracks and report, but also integrate them into the broader business strategy, operation and decision making. In this, enable the organization to respond dynamically to ESG challenges and opportunities and to continuously improve. Because once you have a performance, now you can measure how well you are when you are not doing and you can improve continually. What are some examples you can implement for performance? You can have key risk indicator specific to ESG. You can you can set up those to do what to provide early signals to do what to mitigate the risks. Once we know we are on the wrong track, we can adjust immediately. Performance matrixes create clear matrixes such as reduction in greenhouse gases and measure that improvement in labor practices. Somehow, if you can measure it, maybe through ask the employees, have a survey, are they happy? Are they satisfied? So on and so forth and measure it throughout time. Benchmarking, compare ESG performance against industry benchmark standards or best practices to see how well you are doing. And if there's any areas of improvement, reporting and disclosure on a regular basis, report your performance to internal as well as external stakeholders to do what to maintain transparency and accountability. Also continuous monitoring. You want to keep an eye on how well or not well you are doing to track ESG performance in real time to prompt to prompt adjustments as needed. I'll also incentivize the process and have hold people accountable. If people are following our meeting certain objective, reward them. And people who are not hold them accountable. Also for performance, it could be used as a feedback loops where established feedback loops to learn from ESG performance outcome and integrate them into the risk management. So as you learn, you go back and you integrate the information. Also, see if you can integrate ESG with what? Financial performance, correlate ESG performance with financial performance to underscore the material impact on the bottom line. See if you could measure your ESG to the bottom line because now you can see it. You see how it's affecting the overall company. You could use technology and data analytics using technology, platform and data analytics together analyze and interpret large volume of data when it comes to ESG to make a more informed decision and make sure you are in compliance with what? Regulatories. Like what? Environmental regulation. State, local regulation to make sure you are in compliance. Audit and review. Always you in audit and review. Perform regular audits and reviews of ESG risk management process to ensure they are effectively aligned with the organization objective. And this is all part of performance. The fourth component is review and revision. This stage of ERM for ESG related risk is crucial for ensuring that the risk management framework remain effective and responsive to change over time. You want to review what's going on and revise. On a regular basis review and revise ERM processes with an ESG lens because the ESG needs changes all the time. So you want to make sure you go back to review and revise so the organization can adapt to immersion risk and opportunities and embedded resilience and responsiveness into the risk management practices. And this is not a not a one-time thing for publicity. You want to do this on a regular basis. This ongoing process helps to ensure that ESG consideration remain relevant. Remain relevant to the people, to the company. That we really take it into account in our decision and our organizational strategies, operation to support sustainable business growth and long-term value creation. Why are we doing all of this? Because certain investors they value this. What are some examples of review and revision? Periodic reviews of policies and procedures that they are current and aligned with external and internal changes. Performing performance matrix evaluation and this again would rely to the performance. It says the effectiveness of the ESG performance matrices on regular basis. Don't just set them up. See if they are still relevant to internal as well as external environment. Audit finding. Again you see this concept repeat itself. You want to go back and audit what you did. Revise. Review. Finding from internal and external audit related to ESG matters and implement any necessary changes and always make sure you are in compliance with regulatory framework. Whatever regulatory framework you are utilizing. Other examples of review and revisions. Lessons learned which is integrate lessons learned from past ESG issues and event into the risk management. Whatever you learn. Try to integrate it into the strategy. Again reporting and communication. Again those things appear again and again. The reason is you know we want to report. We want to communicate throughout the process. From setting the strategies the objective to revision and review also report and communicate performance. So notice reporting and communication appears in every component. Also continuous improvement. That's another one that you saw continuously or repeatedly as well as scenario impact analysis. Go back and when you do the review perform different scenarios and always use technology and data systems to improve your decision making and handling the data. The fifth component of ERM information communication and reporting. What we're looking at is a structured approach to ensure. Again remember we talked about information communication and reporting. We have a one whole section in ERM about this. Again those things repeat but that's good. They repeat you learn them better. The information flow effectively throughout the organization into external external stakeholders as well. This ensures that ESG consideration are transparent and central to strategic decision making and operational process. Because when you communicate you create this culture that everybody's aware of ESG and this is why it's important to communicate. Some examples of this will be data collection and analysis systematically collect and analyze data that could impact the organization. This could involve both quantitative data like emission level and qualitative data like employee satisfaction. But also you want to communicate this information. Use robust information system to manage the data. This includes software for track and sustainability matrixes and incident reporting system database for managing stakeholders information as well. You could also have internal communication protocol. How are you going to communicate with your people? This should ensure that from that all level from the board and executives to the frontline people are informed about ESG issues. Internal we need to have external communication. Communicate ESG risks with external people. How are you going to do this through maybe the annual report through sustainability report and other relevant communication news releases so on and so forth. You want to have the stakeholder engage at all time. This is part of information communication and reporting. Invite people and talk to them. Interview stakeholders panel. Have public forums that people air their decisions. Compliance reporting. Make sure that when you report remember this is information communication and reporting. You want to report. You want to report and be in compliance with legal and regulatory requirement as well as voluntary codes for best practices. You don't have to be forced to do that. Assurance and verification obtain external assurance to verify the accuracy and completeness of the information and hence in credibility with stakeholders. So audit your work. Try to get a second opinion about your work. Also you want to have a crisis communication team. Develop a team for crisis communication that includes protocol for any ESG related incidents. If we have an incident, environmental incident, how are we going to communicate to minimize the negative effect and obviously continuous monitoring in real time and make necessary adjustment. Let's take a look at a multiple choice questions from Farhat lectures that help us understand this ESG concept risk. Which investors are companies with strong ESG proposition more likely to attract? So what type of investors are likely to attract? Is it investors seeking only immediate profit? Well everyone is interested in immediate profit, but the word only, well that's you know ESG's investors are interested in something else, not only profit. Investors not interested in company sustainability? Yes, all investors are interested in the company sustainability in the long term survivor of the company. Definitely that's not the answer. Investors supporting sustainable and socially responsible endeavors? Yes. These investors, these investors that are looking at supporting sustainable and socially responsible business will be attracted to a strong ESG proposition. So if companies are saying part of our business is to take into account environmental, social, and have a good corporate governance might attract certain investors. Investors looking for tax startup now yet maybe they don't care about ESG proposition, but investors who support socially responsible endeavors and sustainable activities will be attracted to strong ESG proposition. What should you do now? You want to go to Farhat lectures, look at additional MCQs that's going to help you understand this concept better. Good luck, study hard, and of course stay safe.