The risk of ESG commitments with no ERM alignment
Environmental, social, and governance (ESG) issues continue to grow in prominence for all companies, and their stakeholders. Furthermore, large organisations in the EU are preparing for the Corporate Sustainability Reporting Directive (CSRD), which is introduced to standardise corporate sustainability reporting across the EU. As a result, the need for strong ESG frameworks is becoming an even greater priority for organizations, senior executives, and boards.
Many large companies have already embraced ESG as an essential value add to their overall growth strategy. Nevertheless, many companies are also at the risk of not “walking the talk” by neglecting to align their ESG commitments with their ERM plan. As a Risk manager it is essential to not only to identify major ESG risks, but also to anticipate the liabilities the company is exposed to.
We have collected 4 must-ask questions that risk managers and risk professionals should consider.
4 Questions on ESG Risks that Risk Managers should ask themselves:
1. Are ESG risks included within your company's principal risks?
Your company may have prioritized the ESG agenda highly and committed itself to a range of ambitious sustainability objectives. Have you however thoroughly analysed and implemented ESG Risks as part of your risk management.
When working with ESG Risks it may be challenging to understand in detail how these risks may affect your business. In order to get a clearer picture, it is important to introduce a holistic multi-stakeholder view that leverages all aspects of your sustainability agenda in a challenge of your current risk management framework.
2. Do you adequately manage the “S” and the “G” in ESG or is your organization at risk of Green or Social washing?
There is a growing risk that your organisation’s ESG commitments might expose your business to an increased risk of green or social washing.
An often neglected but essential part of the ESG framework is Governance (G), which entails implementing effective structures, roles, and responsibilities to support ambitious sustainability goals and strategies.
Furthermore, there is often an overemphasis on environmental issues and a relative lack of focus on social and governance issues. As a result, the E overshadows the S and the G, distorting the true nature of the underlying risks. Neglecting the governance of the social and governance aspects of ESG can nevertheless prove precarious, as both areas form instrumental parts of the social license of your business and its reputation among customers, current and future employees, and society as such.
3. Are the company's internal risk frameworks (e.g. Internal Controls, ERM) periodically subject to independent reviews?
How is your company identifying major risks? Are you actually basing your risk management initiatives on an informed and curious risk identification process that actively challenges existing perceptions about your business and factors in key industry dynamics within e.g. sustainability and geopolitical tensions?
It is very difficult to grasp seismic shifts even within business areas close to you – such as your industry, country, or product area. To help fast and effective decision making the human mind has a tendency to jump to conclusions by applying bias and applying historic experiences and solutions to the problems of the future. To balance this cognitive challenge we suggest that you design a risk identification process that actively engages subject matter experts to provide input on some of the most complex challenges your business is exposed to and apply decision-making techniques that have shown to reign our inherent biases and tendency to groupthink processes (e.g. the tenth man rule).
4. How do your ESG commitments influence your financials? (i.e. insurance premiums, investor opportunities, and financing options)
A company’s ESG risk management practice has become central not just in investor relations and for financing purposes but is also being scrutinized by insurance carriers as part of their underwriting processes. Insurance carriers are now systematically assessing companies’ ESG risks management, when looking at placing insurances and some carriers are even prioritising clients with well-defined ESG strategies, while also reducing their exposure to industries and companies with below-average ESG performance.
When designing and placing insurance arrangements it is therefore essential to understand your ESG risks and how to align them with your overall risk management process. Demonstrating your ability to adequately report your organization’s progress on addressing ESG-related risks can not only reduce your premiums but also attract insurance capacity, financing providers, and even investors.
Marsh is helping clients develop their ESG risk performance by analysing and controlling the physical, transitional and reputational risks associated with achieving their ESG objectives.
Our consultants and analysts determine the ESG implications for your organisation through leveraging industry data, risk indices, physical climate models, and key stakeholder perspectives. Unlike other consultancy companies, we are at the forefront of advising how existing insurance relationships might change, and creating new products in response to emerging risks associated with ESG transformations. We will work with you to identify a plan and integrate it into your future ERM processes. Thus, you will not only receive advisory on ESG Risk Management but also obtain a better alignment of risk and insurance management in terms of coverage response and renewal information.
Specifically, Marsh (1) will assist you in defining your targets; namely, what is your organisation’s ESG ambition. (2) This will be followed by an assessment of your organisation’s ESG risk gaps and how to improve risk resilience. (3) Then we will help you determine how your ESG strategy affects your business continuity plans and subsequently how this affects your organization’s risk tolerance levels and risk transfer needs. (4) Subsequently, we will have a look at your reporting requirements and how to effectively improve governance structures in your company. (5) Finally, we will look at future opportunities for competitive advantage and the ongoing maintenance of risk resilience.