Businesses worldwide are becoming increasingly aware of environmental, social, and governance (ESG) risk factors and their potential impacts on their daily operations, social reputations, shareholder relations, investment portfolios, and more.
The three pillars of ESG – environmental, social, and governance – are familiar to business leaders. For years, companies have been strategizing around things like reducing their carbon footprint (environmental), increasing equity in the workplace (social), and shoring up their corporate governance. But traditionally, these issues have been tackled in isolation. What is less familiar to business leaders is the relatively new notion of tackling ESG factors together under an enterprise risk management framework.
“Because ESG is really a framework, or a coined term that means so many different things to different people and stakeholders – especially to the investment community and the insurance community – company directors and board members are being challenged to think through: What is ESG? What does it mean to them personally? What does it mean to their stakeholders? And what risks exist to the companies that they oversee?” said Laura Wanlass, senior client partner and the global governance consulting services practice leader at Aon plc.
“What we are seeing is a quickly evolving landscape,” Wanlass added. “For instance, look at what happened with COVID-19 and how it really pushed forward an emphasis on human capital […] which is a material risk for every company. Before the pandemic, there was more focus on climate, and now we’re swinging back to climate as an area of focus [because of events like the 2021 United Nations Climate Change Conference] COP26 and some of the other discussions that are taking place.
“Leaders of companies have to find ways to sort through the noise and really stay on top of ESG issues, making sure that they not only know about the issues, but they have proper governance mechanisms in place to mitigate risks associated with these issues.”
Applying appropriate governance mechanisms around ESG risk factors is an important way for companies to mitigate their directors’ and officers’ (D&O) exposure. Shareholders and investors expect companies and their boards to be able to articulate strategy and oversight of ESG risk factors in disclosure and through engagement. If they don’t achieve that, they’re at risk of being sued – a trend that’s already occurring in highly litigious societies like the US where there’s recently been litigation over environmental events, climate disclosure, and disputes around diversity, equity, and inclusion (DE&I).
To help corporate clients strengthen their ESG performance, Aon recently released a new report entitled ‘Directors’ and Officers’ (D&O) Update: The ‘E’ in ESG’ – with separate ‘S’ and ‘G’ reports to follow. Wanlass described ‘The E in ESG’ report as particularly timely, not only because it was published in conjunction with COP26, but also because climate change “is definitely top of mind for directors and the C-suite”. She said climate is top of mind for everybody, not just because insurance companies or investors want to understand the risks related to it, but also because climate matters to an increasing number of employees and customers.
“Every company is at a different stage of the ESG maturity curve,” Wanlass told Insurance Business. “How you talk about climate and what actions you take are going to look different depending on where you are in that curve. I think there are a lot of companies looking for information about how to manage climate […] the E in ESG is going to continue to be something that companies are looking for help to navigate.
“There isn’t really a one-size-fits-all [solution] to climate. Every business structure, every industry is different, and your carbon footprint is going to be fairly unique as well. For companies just starting out, in my experience, the most natural way to think about it is to figure out: What is your specific corporate carbon footprint? What have you done to address that, and what could you do better? Before you get into the complexities of your supply chain, or more broadly, the industry you’re in and your business plan, it’s really about figuring out what’s the material risk for you as it relates to climate, and then getting credit for what you’ve done and devising a strategy for tackling it going forward.”
Aon’s global governance consulting services practice, led by Wanlass, supports clients through all phases of their ESG journey, providing a tailored approach to meet them where they’re at on the ESG maturity curve.
“It’s interesting,” Wanlass reflected, “because [with ESG] a lot of things will become popular, whether that’s the commitment for more diverse hiring, or pledging to reach net zero carbon. But what quickly becomes apparent is that companies get credit for being a first mover. It’s easy to say: ‘OK, you showcased some level of sophistication for having talked about this issue and made some commitments.’ But very quickly, insurance companies, lenders, investors, and stakeholders are going to want to see progress. They’re going to want to know what your plan is, and how you’re progressing towards your end-state goal. For example, a lot of companies that have made a net zero carbon goal are very quickly going to have to make certain disclosures, and if they don’t, there’s risk not just from a litigation perspective, but potentially from other stakeholders as well.”