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Take These 4 Important Steps to Manage Your ESG Exposures

Organizations, the SEC, investors and other stakeholders are paying closer attention to Environmental, Social and Governance (ESG) issues, including their link to corporate performance and how ESG impacts corporate risk. ESG concerns, including climate change, environmental justice, diversity & inclusion, and human capital management have become hot topics of discussion.

Investors, employees, customers, regulators, society -- and increasingly insurers -- want to know how companies and their boards are managing ESG risks and opportunities. How organizations tell their ESG narrative across all communication channels is as critically important as the ESG oversight and practices adopted at a company.

Doing so is becoming a sound business practice. Nearly 70% of North America consumers say it is important that a brand be sustainable or eco-friendly, and eight in 10 say they want to know the origin of the products they buy1.

Aside from consumer sentiment, North American companies, regardless of their size, are expected by critical stakeholders, including investors and shareholders, to demonstrate how they are actively managing and mitigating ESG materiality risk factors. As companies fight to stay attractive to investors, the need for a strong narrative, in addition to disclosure and transparency, on ESG can be a differentiating factor.

Evaluating factors include human capital management, climate, governance and cybersecurity. Banks and insurers are looking for evidence that companies are doing everything in their power to address ESG factors appropriately, so they don’t escalate into major risks.2

Further, how your organization approaches and values ESG is starting to become an underwriting tool for insurers, especially as a method to indicate whether a company has a higher probability for losses from emerging risks and potentially harmful events. While evaluating a company’s ESG strategy from an underwriting standpoint is still in its early stages, select ESG predictors can identify a potential issue and help organizations take actions to reduce the impact of risk.3

 

Establishing an ESG Risk Management Strategy

As the expectation of companies focusing on ESG continues to grow in prominence globally, so does scrutiny from stakeholders, which is being felt in corporate boardrooms.   

ESG-related directors and officers risks often include risks related to corporate reputation, project financing, diversity, equity and inclusion, lobbying, and corporate ESG coordination.

Lack of focus on ESG issues are also giving rise to increased litigation, including shareholder derivative lawsuits, alleging that boards’ failure to live up to their diversity commitment is a breach of their fiduciary duty. Other class-related suits include allegations focused on the “social” factors within ESG such as supply chain risks implicating human rights and child labor issues.4

As risk and compliance managers analyze their ESG risks, they are identifying their organization’s ESG D&O and EPLI exposures, working closely with their C-suite and board to ensure that the organization’s ESG strategy includes short, medium and long-term goals that help navigate and evolve along the ESG risk journey.

It is essential to have a clear understanding of how your D&O program will respond to ESG exposures and that the program provides the breath and scope of coverage for shareholder and regulatory claims that involve ESG claims.

While private companies typically have broader protection for defense and indemnity in ESG-related lawsuits, public companies need to ensure they are adequately protected for securities claims arising out of alleged misrepresentations or misstatements in ESG-related disclosures.5

 

4 steps to managing organizational ESG journey

ESG can look very different for each business, depending on size, industry and maturity. An ESG program should be unique to a company’s own facts and circumstances. While there are general guidelines across specific industries, it is up to each individual organization to run its business in a way that brings value to, among others, stakeholders, customers, employees and investors. Use these four steps to help establish a process for prioritizing action items and disclosures that make sense for your own business and your own ESG journey:

 

1

Determine which factors are material- What is material to one stakeholder may not be material to others. Take stock and map out how each of your stakeholders view ESG risks and opportunities so you can determine which items to prioritize given your staffing, business plan and resources. For many public companies that means looking at what top investors deem to be material, including human capital management, cybersecurity, climate change, etc.

 

2

Address Deficiencies- Identify where it is cost-effective and beneficial to make improvements, always keeping an eye toward maintaining and increasing shareholder value and building corporate sustainability. Take stock into what your current ESG strategies are, what your current practices are within various ESG factors, and whether you have any gaps relative to practices against stated goals and objectives and your industry peers. This provides helpful data points to gauge whether you are an outlier or not.

 

3

Report Succinctly- You will receive credit for stating your ESG intentions, but you get more credit from investors and stakeholders if you translate intentions into definable and measurable actions. That can be accomplished through external communications -- if you are not telling the world what you are doing you are not getting credit. Differentiate your ESG activities with a strong narrative, preferably as well as, or better than, your industry peers. Focus on both intention (policy) and outcome (metrics) and set targets where reasonable.  Consistently communicate through such vehicles as your 10K/Q, proxy statements, sustainability reporting and your company website. Take command in communicating your ESG actions. If you do not, someone else will likely be doing it for your business and it may not be the narrative you desire.6

 

4

Continuously Reevaluate- Monitor progress and continue to refine approach as material ESG factors and required disclosures will continue to evolve. This is not a one-and-done process. Consistently revisit where you are on the spectrum as many businesses are in different phases in their ESG journey.7

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For more information on managing your ESG journey view this webinar, Navigating Expectations to Create a Compelling ESG Narrative, which was part of the 2021 Aon Property Symposium.


Two-thirds of Americans prefer eco-friendly brands

2 3 Allianz. The Predictive Power of ESG for Insurance

4 5 Mitigating Environmental, Social and Corporate Governance (ESG) Risks through D&O Insurance

Five Things to Know About ESG Strategy

7 Aon Property Symposium