Why ESG Risks Become Lost Within Organizations

TFM 2015

ESG risk communications usually pass through multiple administrative layers within an organization.  These layers can reduce the fidelity of the communication stream and diminish or lose urgency of significant risks.  Urgent ESG risks can therefore get ‘stranded’ within an organizational chart, which usually means that the risk does not emerge at the board level.

For example, a local cultural resource issue on a mine property may be rated as having a potentially catastrophic consequence by those with local and subject matter understanding.  Yet communication of the risk can become stranded within intermediate corporate functions that lack a primary focus on ESG matters, and within siloed functions right up and across the organization. The risk then fails to get the appropriate attention from top level decision makers.

ESG risks that require subject matter expertise may fail to rise to senior executive and board level attention if that expertise is not clearly reflected in the message. Mine tailings dam safety serves as an example that has emerged in recent years.  The sophistication of analyses and level of detail that underpin proper assessment of dam safety, if not communicated adequately to all key functions and management levels, may lead to an under-appreciation at board level of potentially catastrophic risks posed to the business. Headlines from the mining sector of 3-4 years past offer tragic testimony.  Those events led to improvements such as the creation of Independent Tailings Review Boards that work directly with site, but also report directly to corporate leadership.

The urgency of a highly significant risk identified as critical for a single site may become diluted as it is aggregated across the portfolio with risks from other sites, decreasing urgency for attention at the highest level of the company. Catastrophic ESG failures often emanate from a single site within a much larger portfolio. A highly visible and significant risk for a single site will likely merit attention from the highest level of the company, as illustrated by ‘Risk A’ in the figure below.  The risk process should also transmit relevant chronic or cumulative risks from multiple sites that may affect the company’s welfare and reputation, such as ‘Risk C’, to the highest levels of the company.

The figure presents an ideal concept for addressing such inefficiencies within the standard model for risk management that is widely adopted by major mining companies.  The concept optimizes connections between site, the executive team and board ESG functions by assuring direct communication among counterparts at each level.  These channels may be of the ‘dashed line’ rather than ‘direct report’ model, so long as transparent communication is taking place around significant risks.  Note the availability of appropriate expertise at the board level, a need that is increasingly appreciated in the current climate of heightened focus by stakeholders on ESG matters.  Also note the presence of ‘C-suite’ roles for the ESG area among the executive team.  Whether a Chief Sustainability, Chief Risk Officer or other designation, the need for a role at this level that includes an appropriate ESG focus is becoming more common, recognizing that these risks merit such attention and upward communication to Board counterparts.

In summary, significant ESG risks identified at operational sites must be communicated upward to the highest level within the company structure with reliable fidelity.  Communication works best when conducted through the minimal number of administrative layers possible and between functional areas having an ESG focus.  These areas could include an ESG lead within the General Management team at sites, a C-level executive in the corporate structure and an appropriately resourced ESG committee on the Board. These areas should have the requisite expertise to properly frame risk messages for upward transmission, including risks of high significance that may originate from a single operational site.

Mark Hardin, Principal Advisor, Corporate Integrity

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