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June 2009
Given the increasing demand from investors and shareholders for companies to address--if not to adopt a formal strategy for--sustainability and corporate social responsibility (CSR), boards around the world are sharpening their focus on these issues. From the perspectives of risk management and financial reporting oversight, audit committees may have an important role to play in ensuring these issues receive the attention they require.
"Ecological, social, and reputational risks need to be viewed as potentially important elements of risk assessment in a company," notes Tim Copnell, a founder of KPMG's Audit Committee Institute in the U.K. "The audit committee can be a catalyst in helping to ensure these issues are getting sufficient agenda time and attention by the company."
Understanding the potential impact of the risks associated with sustainability issues and CSR is a first step.
"Business activities that are perceived as being 'anti-social' can have major implications for a company in the marketplace," explains Robert Van Altena of KPMG's Audit Committee Institute in Amstelveen, Netherlands. Implications include:
- Loss of turnover when customers object to certain activities.
- The risk of losing clients as a result of non-compliance with supplier codes.
- Rising costs triggered by higher energy prices and the impact of climate-change policies.
The range of social and environmental risks can be significant--as can the impact on a company's human resources. "Attracting talented employees also can become more difficult when a company's reputation is in question," Van Altena says.
Audit committees also should help ensure that management has considered key business relationships and their potential impact on the company's reputation. "The wrong business partners can cast an ugly shadow on a company," Van Altena warns.
He says the audit committee should challenge management to make a thorough assessment of key sustainability trends and evaluate how the company is incorporating them to suit its own business strategy and governance objectives.
But it's important to view these issues in their full context. "Sustainability should be taken fairly literally, not narrowed down to environmental and human rights issues only," Copnell says. "It also means sound business practices, investing for the long term, adding value, recognizing the value of society's well-being."
This doesn't mean that sustainability and CSR are incompatible with making a profit. Van Altena notes the increasing number of cases where companies have successfully incorporated CSR into their business strategy and have benefited from it financially--pointing to Toyota's Prius hybrid vehicle and BASF's focus on carbon-reduction opportunities to reduce costs as examples. "The board and the audit committee should be helping the company think about these issues as risks and opportunities."
A clear commitment to sustainability, suggests Copnell, also can help attract investment. "Investment funds around the world increasingly take environmental, social, and human-rights factors into account when they devise their investment strategy. Their clients, many of them pension funds, are told by their beneficiaries to press for such a strategy. Companies that advocate and practice sustainable business can profit from this development."
In terms of providing oversight of the company's risk management systems, the audit committee should challenge management on the extent to which the risks associated with sustainability and CSR have been identified, assessed, and mitigated.
"First and foremost, is it part of the company's risk management processes and systems?" asks Van Altena. "And beyond that, has the company integrated these issues into its corporate culture?"
Audit committees should avoid a rules-based approach for addressing these issues, Copnell says. "Of course, there are things to be regulated, but don't start there. At its core, sustainable business is a question of mentality and culture. People who don't mean well will find a way around the rules. Good behavior is inspired, not enforced."
That said, the goals of sustainability and CSR "should be integrated into the planning and control cycle, and the appropriate internal control mechanisms should be in place," says Van Altena.
A recent KPMG survey, Corporate Responsibility Reporting 2008, indicates that 80 percent of Global 250 companies report on corporate responsibility issues in some form.While formal reporting on sustainability and CSR often is not mandatory, Van Altena thinks it eventually could become a standard element of a company's annual reporting.
Copnell concurs: "Until recently, sustainability and CSR were viewed as extras. But more companies now see them as fundamental elements of their business strategy and their risk management efforts."
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