The risk of making environmental, social, and governance (ESG) commitments with no enterprise risk management (ERM) alignment
Governments and regulators around the world have begun to implement codes and regulations on organisations to help reach ESG and sustainability related goals. The European Union has introduced the Corporate Sustainability Reporting Directive (CSRD), which will see around 50,000 organisations begin formal reporting on an annual basis from 2025, based on data from 2024.
ESG topics have become top priorities for a number of stakeholders over the past decade and have even led to legal battles. With the introduction of CSRD across the EU, the claims and pledges companies have made regarding ESG related issues will be put to the test when they begin reporting on them.
Organisations need to quantify and address these issues with both short- and long-term strategies to help ensure they are not exposed. While many companies have actively integrated their ESG strategy into their enterprise risk management (ERM) framework, those that have not could face issues in the future.
Following are some of the most pressing ESG related questions that risk managers should be asking.
1. Should you include ESG risks in your company's principal risks?
Organisations should include their ESG risks in their company’s principal risks. When working with ESG risks, it may be challenging to understand fully how they may affect your business. To get a clearer picture, it is important to introduce a holistic, multi-stakeholder view that leverages all aspects of your sustainability agenda.
Your company may have prioritised the ESG agenda and committed itself to a range of ambitious sustainability objectives but have you thoroughly analysed and implemented ESG risks as part of your risk management?
2. How do your ESG commitments influence your financials?
A company’s ESG risk management practice is central in investor relations and for financing purposes. At the same time, it will likely be scrutinised by underwriters as insurers have begun to systematically assess companies’ ESG risk management. Some carriers now prioritise clients with well-defined ESG strategies in order to reduce their exposure to industries and companies with below-average ESG performance.
When designing and placing an insurance programme, it is essential to understand your ESG risks and how to align them with your overall risk management process. Adequately reporting your organisation’s progress on ESG-related risks can be seen favourably by insurers, financing providers, investors, and other stakeholders.
Do you understand how the perception of your organisation’s ESG programme impacts available financing? Do you have a clear path to improvement, with quantifiable data that navigates the multitude of risks and exposures?
3. Could your organisation be at risk of being accused of green/social washing?
Green and social washing occur when there is material difference between what an organisation presents itself as doing and the actions it actually takes relating to environmental or social issues.
If an organisation publicly makes ESG commitments but fails to act in accordance with those pledges they may face reputational damage.
How do the commitments you have made publicly align with the actions you have taken?
If you are unsure about your ESG programme or want to check it, the Marsh ESG Pulse Check takes only a few minutes and provides analysis immediately upon completion.
4. What impact could an energy crisis have on your organisation?
The current energy crisis is unlikely to be the last, while the transition to net zero may lead to many companies facing national regulations about energy usage and emission targets.
Are you transitioning to a more energy friendly operating model? What plans does your company have in place to remain operational if energy rationing is introduced?
5. How could an extreme weather event impact your operation?
Depending on your location and industry, extreme weather events will impact you differently, and the chance you will not face any risks is becoming increasingly slim. Extreme weather events can lead to increased instances of business interruption by disrupting supply chains, causing power outages, and causing direct operational consequences.
How have you recognised and planned for these risks? Have you forecast an increase in frequency or severity? Does your current insurance coverage adequately protect against an extreme weather event?
6. How secure are your supply chains?
A number of recent events have highlighted how global supply chains can become blockaded, causing severe delays in moments of crisis. With the rising spectre of the global cost of living crisis and inflation affecting all sectors of the economy, including fuel and energy costs, raw materials, and food prices, organisations need to have a robust supply chain contingency plan in place.
Where are the potential bottle necks in your supply chain?
With increasing geoeconomic and political tensions rising, some nations are restricting the free movement of goods such as semi-conductors. How diverse are your supply chains?
7. What impact does the cost of living crisis have on organisations?
The current cost of living crisis impacts countries differently, but most are experiencing higher rates of inflation than they have seen in the last 20 years. Consequences include consumers restricting spending, business partners putting projects on hold, and employees struggling.
Do you have a plan in place to help your workforce cope with these sudden changes? Will this impact your recruitment and/or retention strategy? Have you assessed the risks and opportunities arising in the current environment, as well as the most suitable mitigation actions?
Assessing your organisation’s ESG programme
Our team of experienced specialists can help determine the implications of ESG issues for your organisation. Marsh is at the forefront of understanding how existing insurance relationships might change, and creating new solutions in response to emerging risks associated with ESG transformations. We will work with you to create a plan and integrate it into your future ERM processes to improve the alignment of risk and insurance management in terms of coverage response and renewal information.
Our ESG Pulse Check tool provides a quick first step on your ESG journey.