ESG – Three letters that signify aspirational goals which are often hard to define and at times controversial. Environmental, Social and Governance (ESG) related issues are no longer priority only for regulators. The expectation for companies to have a comprehensive ESG strategy is also held by employees, customers, investors, and partners.
What is ESG?
Environmental, Social, Governance – beyond those three words what does it really mean? The collective strives to incorporate initiatives from these areas and the effects they have on decision-making in society by corporations and individuals. Foundational ESG topics include climate change, carbon footprint, socioeconomic factors, corporate responsibility, diversity, equity and inclusion (DEI), community investment, executive compensation, ethics, and board accountability.
While sometimes hard to quantify and often debated, ESG is being defined domestically and globally by regulators, invested in by governments and corporations, and considered a priority for many individuals in their personal decision-making. No matter your personal beliefs on ESG tenants, it is impossible to ignore. Even America’s favorite pastime has now joined the ranks of activities impacted by environmental factors with over five hundred home runs in Major League Baseball since 2010 being attributable to historical warming.1
A plethora of global and domestic regulations have been enacted to govern and reinforce certain areas of ESG. More are on the horizon as the need to quantify ESG compliance increases to appease investors and customers. Corporations are investing in ESG by developing internal risk management policies, touting hiring and pay transparency, and updating corporate structures through the addition of ESG focused management positions. An increased percentage of individuals are using their purchasing power to invest in portfolios with ESG targets as well as buying goods and services from companies with clear ESG policies. Companies with well-defined ESG positions may have an advantage in hiring and retaining employees.
Quantifying the cost
ESG related issues continue to have a direct impact on companies, their reputation, and their profits. These risks can have detrimental and costly impacts on businesses. Bank of America Global Research estimates S&P 500 companies lost more than $600 billion of market cap to “ESG controversies” in the last seven years.2 Businesses are facing increased scrutiny related to these risks as investors, employees, and consumers demand greater accountability in business practices. Some tangible examples:
- Environmental: Pacific Gas & Electric agreed to pay more than $55 million for two major wildfires started by aging Northern California power lines they owned.3
- Governance: Poor governance resulted in the recall of millions of Volkswagen cars after the company admitted to falsifying emissions tests, costing $35 billion in fines, penalties, financial settlements, and buyback costs.3
- Environmental: In 2022, climate related disasters, cost more than $165 billion dollars of damage, a high price tag to pay for businesses and consumers alike.4
- Governance: The Silicon Valley Bank failure has been attributed to poor governance.5 No matter your personal or political leanings, if the failure was poor investment choices or not having a proper risk manager in place, all angles expose poor governance policies.
- Social: There are varying opinions on the importance and validity of DEI recruiting and hiring policies along with new pay transparency guidelines. However, it is uncontested that costly legal battles over hiring and employment practices are not good for business.
- ESG: Each of the above examples carry a significant dollar cost. You must also consider the intangible costs around maintaining your corporate brand and reputation, hiring and retaining quality candidates, attracting customers, and gaining trust with vendors, investors, and business partners.
What should I do?
The tangible and intangible costs of running a business without ESG targets is simply too great to ignore, with direct and potentially devastating, negative impacts to your employees, clients, and bottom line. Following ESG frameworks can help your firm decrease its risk profile while also benefiting from the many advantages that come with ESG incorporation.
A few things to consider in your own agency as well as with your clients when considering ESG risks:
- Do you currently have a dedicated role that manages ESG related items? Identifying the responsibility of ESG risk can be tricky as it can touch every aspect of the business. Ensuring a point person for responsibility and tracking can assist firms in identifying ESG risks and following through with initiatives. This can either be a C-Suite executive (Chief Sustainability Officer or CFO) or an internal committee established to evaluate ESG initiatives.
- What are your ESG initiatives? The nature of ESG means it is constantly evolving to emerging trends and risks. Is it time to revisit your internal governance processes and procedures? What about your hiring practices?
- What are your current reporting standards for ESG metrics? ESG has been hard to define, so creating quantifiable tools to measure your success is critical. Metrics increase accountability and shareholder value. As regulations continue to emerge, your firm should be ready to pivot and respond.
- How are you communicating your ESG commitment? Having a proper communication strategy will allow you to strengthen your brand, attract talent, clients, and business partners. It is an important part of your value proposition. Having management buy-in is critical to the success of ESG policy implementation, and formal corporate statements can successfully reiterate that.
- Is ESG important to your firm? Your clients will be held to ESG compliance standards, facing a multitude of risks under the three tenets. Educating clients is a big part of your job along with offering cutting edge policies, protection, and service options. Your ability to add value as a broker, shining a light on existing and upcoming risks, is strengthened when you, yourself are a leader in this regard.
By ignoring ESG tenets in your own agency, you put yourself at great monetary and intangible risk. A broker who is able to holistically evaluate their own business to predict and mitigate risks is invaluable. Not only can emphasizing ESG risks help the world be a better place, but it can also help your shareholders, your clients and your business.
Insurance and ESG are inextricably linked through their core principles – to mutualize and mitigate risk for the benefit of society. As risks evolve, so must brokers and policies. Staying ahead of these trends is what can separate you as a top-tier brokerage. Ignoring the trends can leave you exposed to significant risks.
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