LinkedIn Facebook Twitter Email

Corporate change-makers: The importance of ESG and how to mitigate risk

Corporate change-makers: The importance of ESG and how to mitigate risk

The pandemic isn’t the only event that altered the business and insurance landscape during the past several years. A culture shift bloomed in 2020 that placed heightened responsibility on corporations to reflect authentic commitments to corporate governance; diversity, equity, and inclusion (DEI); and sustainability in their business practices.

Consumers and investors look for evidence of these commitments in a company’s environmental, social, and governance (ESG) policies; according to Gartner, 85 percent of investors looked at ESG factors when making investment decisions in 2020. In fact, many investors are now looking at ESG as a reflection of a company’s core values. If businesses make promises they don’t keep, the consequences can be steep – on both reputations and bottom lines.

Follow along to learn more about the relationship between ESG claims and risk, and how businesses can ensure their intentions and actions hold up to public scrutiny.

The high cost of inaction

In the words of the Harvard Business Review, “an ESG reckoning is coming.” In past decades, leaders could make bold ESG claims without backing them up, and claim ignorance when they proved untrue. Today’s consumers and investors expect business leaders to know the truth and share it.

As David Perez, chief underwriting officer of Global Risk Solutions at Liberty Mutual Insurance, says: “Environmental and social consciousness are really becoming a table-stake requirement for many consumers and investors. Both want to know that businesses are transparent and showing their progress on these key issues.”

According to Gartner, 85 percent of investors looked at environmental, social, and governance factors when making investment decisions.

Making empty promises around ESG can carry harsh consequences, both financially and for the company’s brand. “ESG is something that investors are concerned with as well as customers,” says Perez. “Falling short will be treated much more harshly, both in the court of public opinion and in the actual jury box.”

Specific examples of how companies might be affected:

  • Recent reports on climate-change disclosure mandates from the SEC may result in both legal and financial repercussions for businesses that haven’t been transparent about their carbon footprint.
  • Corporations that actively harm constituents may face public nuisance lawsuits, in which a state or local government plaintiff sues for restitution on behalf of constituents. Companies that produce tobacco and opioids have faced these charges before, but experts suggest that companies could also be sued for negligence that results in a detrimental impact on the environment. 

There are also other, less obvious, financial repercussions for companies that don’t prioritize ESG – like low employee retention rates or losing customers to more environmentally or socially conscious competitors. For example, consumers and investors alike have rallied around companies like Unilever, which is on track to cut plastic use in half by 2025, and Costco, which recently committed to pay its employees a $16 minimum wage. Consumers want more than temporary solutions or half-hearted efforts – they want to see permanent and systemic changes in how business is done. For companies, relationships with vendors, partners, and investors are possible areas of scrutiny and potential liabilities. While it takes more effort to ensure compliance, companies that go the extra yard can reap marketplace benefits.

Making change and managing ESG-related risk

The reality is there is no quick fix when it comes to ESG, and a wrong move can negate your ESG policies and put your company under fire. In this fraught landscape, insurance providers play a pivotal role in risk management. “The insurance industry is going to become a bigger leader, overall, in terms of helping customers manage transition while recognizing that the importance of ESG in not only the investment side of the house but also the underwriting side of the house,” says David Perez.

While ESG is still in its early years, customers want to see that businesses are engaging in a transition toward more ethical business practices, and now is the time to start making proactive changes.

“ESG is something that investors are concerned with as well as customers,” says David Perez. “Falling short will be treated much more harshly both in the court of public opinion and in the actual jury box.”

We’ve noted five components for an effective ESG program, having observed these as we work with midsize and large companies around the globe, and in our own journey as a Fortune 100 company deeply committed to sustainability, DEI, and responsible corporate governance. While they may seem like common sense, the challenge lies in implementing them across an organization.

The five components include:

  1. Having senior leadership commit to ESG as a core strategic imperative. A comprehensive map is not needed to start the journey, only a clear and decisive commitment. And that should start with the board of directors and the C-suite.
  2. Understanding leading exposures without ignoring others. Companies may inadvertently focus ESG programs on the obvious exposure at the expense of others. For example, a manufacturer may address E but not S, despite having a large impact on the community in which it operates. Make sure you are looking at things holistically, because issues tend to be interconnected across E, S, and G.
  3. Building a strong structure to create engagement throughout the company. Successful ESG journeys are both top-down and bottom-up. Management sets the tone and expectations, but fully engaged employees drive results. Having a dedicated unit is helpful in developing and managing a strategic ESG plan, engaging employees to craft and communicate policies, tracking and reporting results, and suggesting modifications to the plan.
  4. Cutting across silos and geographies to build a consistent approach across the organization. This should also include those company operations that can impact the broader community. For example, companies should include ESG considerations in the selection of vendors, philanthropic partners, and advocacy efforts.
  5. Maintaining ongoing employee communications that set expectations, give direction, and transparently report on the journey. Beyond understanding the importance of ESG as a driver of the company’s success and how it will drive day-to-day decisions, employees at all levels need to know their role in the journey and that there will always be more to accomplish.

ESG needs to be a line item on the board agenda, and business leaders should take a closer look at vendors, suppliers, partners, and investment portfolios to ensure they are working with sustainable and socially responsible businesses up and down the supply chain. Companies should also look at their internal hiring and work practices and anticipate a high level of transparency with both consumers and investors.  

During this transition period, corporate leaders should work with their insurance providers to evaluate potential liabilities, prepare for future risk, and understand common elements of successful ESG journeys. “Businesses have to be engaged in navigating their own transitions,” Perez says, “and insurance can help them do that.” By sharing your company’s ESG strategy with your insurance broker and carrier, you can have productive conversations about risks and opportunities as you align your mission with today’s most important social and political issues.

To learn more about interconnected risk trends, go here.

This website is general in nature, and is provided as a courtesy to you. Information is accurate to the best of Liberty Mutual’s knowledge, but companies and individuals should not rely on it to prevent and mitigate all risks as an explanation of coverage or benefits under an insurance policy. Consult your professional advisor regarding your particular facts and circumstance. By citing external authorities or linking to other websites, Liberty Mutual is not endorsing them.