Starting this month, the Competition and Marketing Authority (CMA) gains new powers to fine businesses for misleading greenwashing claims, which Cambridge Advance Online says will make ESG risk management more critical than ever.
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As of April 6th, environmental claims that breach consumer law and fail to meet the CMA’s Green Claims Code could result in fines of up to 10% of a company’s global turnover, or £300,000, whichever is higher.
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“Greenwashing” has surged as a breakout Google trend (>5,000% increase) over the past five years, driven by growing consumer awareness of misleading corporate sustainability claims. This is supported by a rise in the number of people searching for company ESG ratings, with interest in “S&P global ESG scores” spiking by 100% in the last 12 months.
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Ahead of the new regulations, the CMA urged 17 major fashion brands to review their green claims, publishing a tailored compliance guide for the industry.
“When managing ESG risks, businesses must consider a broad range of factors, moving away from simply being an exercise in compliance”, advises Martin Massey, ESG Risk Management course lead at Cambridge Advance Online.
That said, the crackdown from regulators has created a dual lens of materiality as companies are accountable for both the risks they face and the broader impact they have on society and the environment. Many are realising that policy and regulatory changes are risks in themselves and if they fail to adapt their reputation will suffer, which could cause significant brand damage.
To mitigate risks, Martin urges businesses to maintain high standards of corporate governance, including transparent practices and effective board oversight. He recommends the ‘four Ts’ to help classify risk treatment options, each offering a different approach to considering how best to tackle the risk:
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Tolerate: If a risk has a low likelihood and impact, it may be acceptable to retain it, but it should be logged and monitored.
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Terminate: If a risk is far beyond your company’s appetite for risk or if it could severely impact your business, these activities should be terminated.
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Treat: You will almost certainly decide to take action to mitigate the most severe risks. This might include taking steps to reduce the likelihood of the risk occurring, or the severity of the consequences if it does.
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Transfer: You can opt to transfer risks to third parties, for example, through insurance. While risk transfer incurs costs, it helps reduce or eliminate the potential impact of the risk.
Using risk management as a framework will enable business leaders to understand their exposure to ESG and the opportunities it might bring them. “From a risk perspective, it’s the risk appetite framework that companies should be reviewing and changing”, says Martin. This needs a comprehensive approach, incorporating a robust framework with the right mix of policies and procedures, technologies and training opportunities.
ESG software can play a crucial role in this process by streamlining reporting, reducing administrative burdens, and enabling companies to focus on implementing strategies with a tangible impact on their ESG goals. Continuous monitoring provides transparency, which Martin notes is increasingly important as regulators look to see how well companies are managing their ESG risks.
“There’s a whole range of ESG-related software that’s being designed and developed, ranging from ESG scoring systems used within due diligence processes to improved governance systems for managing and monitoring ethics and fraud through, for example, whistleblowing software”, Martin explains.
However, he continues, “The challenge is to integrate these solutions into an organisation’s existing IT systems, and this includes a wealth of new data challenges.”
“Having an ESG training and education programme for all employees, particularly senior management, is also really important to improve the risk culture of a company”, Martin adds. Educating staff on ESG principles and responsibilities will facilitate the effective implementation of best practices and reduce the risk of greenwashing.
As Martin has argued, effective ESG risk management goes beyond regulatory compliance – it also strengthens resilience and the ability to adapt to changing market conditions today and into the future. By integrating ESG into existing risk frameworks, companies can manage risks more proactively and build long-term value, while meeting the increasing demands of regulators.
More of Martin Massey’s recommendations for ESG risk management in light of this month’s regulatory changes can be found at: www.advanceonline.cam.ac.uk/blog/how-to-manage-esg-risk