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EEA Norway Grants: The role of risk intelligence in ESG assessment

In 2023 the EU adopted two crucial documents regarding sustainability reporting for large companies as well as small and medium enterprises (SMEs). The Corporate Sustainability Reporting Directive (CSRD) and the subsequently adopted European Sustainability Reporting Standards (ESRS) both highlighted a shift in the perception of business operations. The standards for businesses will arguably be higher with the benchmark shifting from a purely performance-based focus to including the companies’ impact. The reporting responsibility will include the initiatives in different aspects classified as Environmental, Social, and Governance (ESGs).

The effects of climate change are becoming increasingly important for CFOs, with 30% of respondents reportedly claiming that they scrutinised the impact on their financial performance in 2023. With the adverse effects of climate change influencing major business decisions, ESG is especially growing in importance. An additional impetus is given to the cause by the regulatory environment in the EU that will require companies to report on their ESG status. While the initial reporting phase affects the larger companies in banking and insurance, SMEs will be expected to report from 2026.

While ESG requirements cover business operations holistically, in the current climate most attention is given to the environmental aspect, with some limited amount to the social, and the least to governance. This is already visible with the number of topics identified for each section of ESGs in the ESRS. Despite the prevailing imbalance, all three will play an important role in future business decisions as increased scrutiny is expected to address business impact.

In the ESG trends for 2024, Reuters identified supply chains as a major part of the environmental and social aspects. However, within the trend of increased scrutiny for third parties in the value chain of businesses, the governance aspect is expected to grow in significance. The governance aspect includes transparency relating to business culture, business partners, and business ethics, but also political involvement and the risks related to them. Hence, it will become even more critical for businesses to know their counterparts, suppliers, and partners as their involvement and actions will become largely consequential for the organisation.

This increased focus on transparency will also mean that companies will have to rely on accurate information, go beyond surface-level assessments, and rely on actionable risk intelligence. As businesses have a reputation to uphold and protect, it will become crucial to show that their operations do not contribute to dubious practices or involve questionable individuals. Therefore, in line with the expectations of greater scrutiny and assessment of the impact of business operations, it is likely that assessing the reputational risks or business integrity will become the industry standard.

ESG reporting shines the spotlight on the complex societal impact of companies creating new trends in business operations. Increased scrutiny and assessments of the environmental, social, and governance effects of business operations will likely increase the operating standards of businesses. While the initial regulations will impact the largest companies in banking and insurance, the topics outlined in reporting frameworks are widely applicable in smaller environments and are expected to impact SMEs from 2026. The higher business standards will attribute greater importance to business reputations consequently increasing the importance of relying on sophisticated risk intelligence. Therefore, supply chains will be pivotal to the E and S, with the caveat that risk intelligence is expected to put the G in ESG.

This project is financed by EEA Norway Grants.



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