The role of risk culture in creating an ethical business
Key insights from the Conduct and Compliance Summit and RiskMinds International 2023
Companies’ efforts to be ethical, while remaining profitable, require a strong risk framework that incorporates environmental and social risks via ESG metrics, allied to conduct risk, covering staff behaviour, AI design and so on. Traditional risks such as credit, market and reputational risk cannot be forgotten either and should overlap with the ESG sustainable and ethical drivers to create a unified risk framework.
A good culture drives good behaviour and good conduct.
It’s not just a technical matter of ticking ESG boxes. Ethics must be part of a company’s DNA.
However, the future of ESG was very much up for debate, with another panellist viewing the environmental element as very different to the social and governance metrics, commenting: “I see them as segregated pillars.” Perhaps they could benefit from being broken apart? This would stop accusations of greenwashing when polluters gain good marks from social well-being projects, although equally the world needs power and investment in that infrastructure as the green transition towards renewables escalates. The transition needs management.
Separated pillars might reward more fully those with strong climate risk programmes via better insurance quotes or loan pricing in the future. However, mining companies, which extract precious metals like nickel that are essential to make green machines, electric batteries and so on, still need financing. Should they be punished for being further down the supply chain?
Panellists viewed ESG as in transition at the moment, rather than dead, and in need of evolving to aid profitability and remain relevant as it embeds itself into financial institutions’ compliance functions. “It’s a journey,” said one, advocating for more granularity.
We’re at the end of ESGs first iteration, which has been about disclosure targets and reporting. We’re now moving as an industry towards addressing what type of business we want to be in the future.
Bonnie Frank, Managing Director and Head of Private Investment and Enterprise Risk, PSP Investments, explores the reasons why risk culture has become a necessity for financial services and talks about the role diversity plays in the coming years.
We're going to need a diversity of talent and a diversity of opinions in order to tackle [new areas such as AI, macroeconomic and geopolitical events]
