Stora Enso: A governance model and culture that enables enterprise risk management and sustainability integration

“If leadership from the top is a prerequisite for success, then it goes without saying that the sustainability function should sit in the C-suite with its own responsible executive. This individual requires the necessary business and sustainability competence and experience to successfully negotiate with other C-suite executives on a peer-to-peer basis. Anything less will lead to a suboptimal result.” Noel Morrin, Executive Vice President, Sustainability

Stora Enso,¹ a global leader in providing renewable solutions for packaging, biomaterials, wooden constructions and paper, has demonstrated the importance of corporate governance for integrating sustainability into Enterprise Risk Management (ERM). Stora Enso’s stated purpose of “Do Good for the People and the Planet” embodies the importance of sustainability to the company. Sustainability is fundamental to the investor proposition and strategy. Further, it is integral to decision-making across all of Stora Enso’s operations and activities such as the production and sales of renewable products, buying trees from local forest owners, selling electricity generated at its mills and managing its logistics on a global scale.²

In 2014, the company took steps to more clearly integrate sustainability-related issues in ERM from the board level to its supply chain. Using governance to help integrate sustainability into ERM has strengthened Stora Enso’s management and oversight of sustainability issues and risks. These activities underscore the importance of sustainability for the company: It’s more than a stated purpose; it is deeply embedded in the company’s culture.

Strengthening corporate governance to enable sustainability and ERM integration

Although sustainability has been part of Stora Enso’s business model for decades, the need to integrate sustainability formally into the company’s ERM was catalyzed in 2014 by the discovery of child labor in the supply chain of Bulleh Shah Packaging (BSP), Stora Enso’s 35%-owned equity-accounted minority investment in Pakistan.

Following that discovery, BSP implemented extensive processes to identify and address child labor in the operations of its direct suppliers. In parallel, Stora Enso entered into a public-private partnership with the International Labour Organisation (ILO) to strengthen their global policy, to promote decent work and to combat child labor.³ The incident catalyzed the Stora Enso Board of Directors to mandate a governance change and a more integrated approach to risk management that included all aspects of sustainability.

Elevating sustainability to the C-Suite

Following the events of 2014, Stora Enso enhanced its governance model to more fully integrate sustainability across its business. This integration and emphasis was championed by the Board of Directors, the CEO, and the Group Leadership Team (GLT).  During 2014, Stora Enso made several changes to its organizational structure, with the aim of bringing sustainability management closer to the CEO and the Group Leadership Team (GLT). It also moved to integrate material Environmental, Social and Governance (ESG) topics more deeply into core business and strategic planning.

In 2015, sustainability became an independent function with its own Executive Vice President who reports directly to the CEO and is a member of the GLT. This governance change has been instrumental to embedding even more sustainability within the day-to-day operations of the business, including ERM. The current membership of the GLT is set out below and includes sustainability at the highest level.

Stora Enso’s Board of Directors, which oversees management’s activities, also emphasizes sustainability. The Board has nine members and three committees,⁴ one of which is the Sustainability and Ethics Committee. This committee oversees the implementation of Sustainability and the Ethics and Compliance Strategy. The Board and its committees regularly review key risks and performance which include a review of sustainability efforts. In addition, Stora Enso’s Board members have strong sustainability credentials which enable them to provide robust inputs.

Stora Enso’s CEO and GLT⁵ are ultimately responsible for ensuring that sustainability practices are implemented in operations through policies and performance management. On a daily basis, sustainability issues are addressed by the Executive Vice President of Sustainability in conjunction with legal, human resources, sourcing and logistics, wood supply functions and each division (Consumer Board, Packaging Solutions, Biomaterials, Wood Products and Paper). All of the company’s business divisions have their own Head of Sustainability, who reports directly to the Executive Vice President of that division.

Integrating sustainability and ERM functions

Alongside increasing the prominence of sustainability within the organization generally, the company also has taken explicit actions to integrate sustainability and ERM. For example, Stora Enso appointed a Senior Vice President of ERM with relevant sustainability experience to oversee ERM development in collaboration with the sustainability function. Also, an internal ERM working group has been established to coordinate risk management across the organization. Members of the working group include the divisional risk managers and the Senior Vice President, ERM. Furthermore, the ERM function participates in internal forums and working groups on sustainability.

The ERM process is run by divisions based on a set of group-level guidelines that are consistent with the COSO Framework and include guidance on:

• key definitions
• objective setting
• risk modelling
• classification
• identification and evaluation including assessment criteria
• rules on calculating residual risk
• reporting requirements and templates
• determination of risk appetite

Each division is responsible for addressing the company’s sustainability agenda and has the support of sustainability subject matter specialists aligned to each of the company’s ten sustainability issues. The division may prioritize additional division-specific material sustainability issues in consultation with sustainability subject matter specialists. The sustainability subject matter specialists are also responsible for engaging with external stakeholders.

In addition, Stora Enso has embedded sustainability into the Group Risk Policy which builds upon the company’s introduction of the Triple Bottom Line model into sustainability in 2016.⁶ Triple Bottom Line is an accounting framework that encompasses social, environmental and financial components and which enables companies to measure and understand the value of their assets and performance more holistically.

This framework guides daily operations as well as the achievement of Stora Enso’s overall business strategy and goals.⁷ The framework addresses ten material sustainability topics (referred to as the 9 + 1 materiality matrix) as identified by Stora Enso: employees and wider workforce; community; business ethics; materials, water and energy; carbon dioxide; forests, plantations and land use; customers; suppliers; investors and human rights. Human rights is considered cross-cutting and is therefore addressed as an overarching theme.

These ten sustainability issues have served as a ‘lens’ for identifying Stora Enso’s Group Risk Universe (see the figure below). All risks are reviewed across the business on a quarterly basis and the risk universe is amended accordingly to adapt to changes.

Challenges to integrating sustainability and ERM

Integrating sustainability within ERM can pose significant organizational challenges. Through Stora Enso’s revised governance model and related actions, it has addressed many of these challenges - and, in many cases, the company has leveraged such challenges as opportunities to strengthen sustainability and ERM and improve outcomes.

Challenges that Stora Enso has faced throughout the integration process include:

• Differences in language used between sustainability and risk functions;
• Differences in approaches and metrics used for quantifying risks across functions;
• Differences in time horizons used for considering sustainability risks;
• Differences in thresholds for risk appetite associated with sustainability risks.⁸

Developing a common organizational language and understanding is fundamental to integration. Risk management and sustainability professionals often use different terms - which can hinder collaboration across functions.

There needs to be translation or ‘translators’ who can understand the languages and concepts used across functions. At Stora Enso, this process has been facilitated by the Senior Vice President of ERM, who has experience in sustainability. In addition, divisional risk managers and divisional representatives in the ERM working group act as translators within the risk team to coach sustainability staff in using risk language.

In parallel, the company has focused on ensuring ERM professionals have sufficient sustainability knowledge through participation in internal forums and working groups on sustainability. To reinforce this progress, Stora Enso developed a regular cadence for cross-functional dialogue through focused activities such as development of risk appetite and quantification of certain sustainability risks.

Quantifying sustainability risks can involve different processes and metrics from those traditionally used by ERM functions. For example, Stora Enso only monetizes sustainability risks when a sufficient basis exists for determining the costs should the risk materialize. In most cases, the assessment is based on qualitative criteria. Nevertheless, quantification of all risks - sustainability and otherwise - at Stora Enso is conducted according to the same set of risk assessment criteria and principles to achieve comparability across all risks.

Time horizons are often longer for sustainability risks, which has been a challenge to integration. Historically, Stora Enso used a five-year time horizon for risk management which is consistent with the company’s financial strategy. During the integration process, Stora Enso recognized that some sustainability-related risks, such as impacts from climate change, may develop over a longer time horizon, which can be up to 25 years. To address this challenge, Stora Enso identified which risks require a longer-term view and considered these different time scales during risk identification, assessment, prioritization and response.

Stora Enso found setting risk appetite across sustainability dimensions in line with the organization’s corporate strategy was critical to integration. The company uses a pragmatic approach to defining risk appetite, which has become an opportunity for engagement and alignment across functions. Risk appetite is determined across risk categories following standard appetite descriptions and linked to the thresholds of risk impact assessment criteria.

Business outcomes of Stora Enso’s integrated sustainability and ERM model

The company’s revised governance structure and associated processes have laid the foundation that has enabled the integration of sustainability and ERM within a short period of time. Facilitating sustainability and ERM functions to work together has strengthened the management and oversight of sustainability issues and risk management more broadly.

For example, in conducting functional risk reviews, certain sustainability risks which were not escalated earlier have been uncovered, re-prioritized and assigned action plans. Furthermore, using material sustainability issues as the lens through which to consider the risk universe is an important means to build resilience in the company’s business model. The effectiveness of this approach is evidenced through achievements such as the inclusion in the CDP 2016 Climate A List and Supplier Climate A List and the UN Global Compact 100 Index.⁹

Future plans entail ongoing development and refinement of metrics to support decision-making and a continued emphasis on organizational culture. Stora Enso plans to maintain the journey towards having sustainability understood and managed the same way as finance, marketing and other risks.