ESG has become an executive-level business issue given strong and rising interest from investors, consumers, employees and regulators. Boards of directors and business leaders are working to understand what ESG means for their organizations as well as their industries as they try to balance the needs and priorities of different stakeholders. And they are trying to determine how to set priorities in line with various stakeholder needs.
While some may view ESG as a challenge, we see it as an opportunity to build future-proof, resilient and sustainable organizations. We sat down with our executive leaders and some of our experts in people, risk and capital to get their perspectives on the multiple dimensions of ESG and their insights into how some organizations are already finding the opportunity in ESG.
Because ESG touches so many dimensions, it can have a huge impact on an organization’s value – both from a financial perspective and beyond. It affects valuation premiums and can determine access to, and the cost of, capital. It can increase brand equity, boost customer retention as well as help attract, retain and engage employees. Overall, it can build reputational capital across stakeholders.
Let's go on this ESG journey together to take out the parts of ESG that aren't impactful and work to make ESG programs something we can all benefit from.”Carl Hess | CEO
Recent pushback on ESG is a sign that it is evolving. Calling out misinformed approaches helps make the case for proper design and action. I believe we should take these concerns and criticisms seriously and use them to evolve ESG concepts. Many business leaders are already using the critique of ESG programs to analyze their current approach and rethink their strategies to create more value and impact.
When you’re able to pause and understand the reasons behind the criticism of some aspects of ESG, you can create enhancements and make the programs stronger, more consistently tangible, meaningful and measurable and, ultimately, more effective in meeting intended goals.
Let’s go on this ESG journey together to take out the parts of ESG that aren’t impactful and work to make ESG programs something that we can all benefit from.
At the end of the day, ESG is a risk question. Whether it’s climate, diversity, equity and inclusion (DEI) or good governance, it all comes back to risk. Companies that embrace ESG and have a robust plan to address it are, by definition, better run companies. If you were applying a risk rating to those companies, you would likely assume that those with robust ESG plans carried less long-term risk, were less likely to be sued for failures of governance and were more likely to succeed over the longer term.
Insurance companies are factoring in ESG consciousness and actions when considering the premium they will apply to certain risks for individual companies. ESG cognizance is no longer “a nice to have.” The degree to which it is understood and acted upon will affect the availability and price of capital.
We believe in an orderly transition to a low-carbon economy and using insurance as a force for good to help take us down this path.”Adam Garrard | Global Head, Risk & Broking
In addition, client business models are changing as they move from a high-carbon to a low-carbon mode, which means the risks they are facing are also changing, so we help them to understand those risks. Capital is becoming harder to find for those considered high-carbon industries. We believe in an orderly transition to a low-carbon economy and in using insurance as a force for good to help take us down this path.
Insurance can and is becoming a motivating element of transition. When companies commit to the transition and have an auditable transition plan, for example, the availability of capital providers is more abundant and, as a result, the price of capital is more affordable.
ESG is also a people issue (and a people risk issue) because it factors into individuals’ decisions to join an organization, stay there and go above and beyond to help them succeed. Environmental, social and governance approaches also impact performance and growth. And, ultimately, organizations adapt and become sustainable through their people.
In this context, HR is well positioned to influence and advance their organizations’ ESG priorities with aligned talent strategies and workforce programs.
Doing so isn’t without its challenges, given the many competing priorities, differences in views and budget limitations. Yet, I’ve seen many HR leaders manage through the challenges – sometimes tackling one item at a time and sometimes connecting them in an integrated fashion.
Across industry, geography and business cycles, the chief human resources officer is in a central position to collaborate with other leaders on policies and practices that advance ESG efforts.”Julie Gebauer | Global Head, Health, Wealth & Career
The list of “how to” is long and varied. For example, lots of leaders have put in programs, processes and measuring sticks to increase workforce diversity and representation. Many are contributing to their organizations’ environmental commitments with support for electric vehicles in their transport programs or reducing their carbon footprints by switching to hybrid and virtual working. Others are refining their pension plan investment policies to incorporate ESG principles. And some are putting it all together with ESG commitments and strategy statements that are reported annually.
Across industry, geography and business cycles, the chief human resources officer is in a central position to collaborate with other leaders on policies and practices that advance ESG efforts.
In Europe, ESG is rarely out of the headlines – from the European Green Deal striving to make Europe the first climate-neutral continent to the recent increased focus on regulatory scrutiny of ESG data providers and anti-“greenwashing” controls. But while the headlines are big, the connections across people, risk and capital when it comes to ESG are infinite!
Focusing on – and meeting ESG goals – helps to maximize long-term shareholder value.”Anne Pullum | Head of Europe
For example, if companies execute on comprehensive wellbeing and employee experience strategies, they reduce their financial risk through increased employee retention and engagement and fewer errors and omissions. This enables organization to deploy a greater share of capital to grow their businesses versus addressing losses or protecting damaged reputations. If you’re not able to connect across people, risk and capital, you might also have to deal with attrition issues.
From an environmental perspective, taking steps such as committing to sustainable capital deployment or disclosures is a people-attraction mechanism in itself, which creates value for employees, shareholders and community stakeholders. But regardless of which aspects of ESG you prioritize, if you look at it collectively, focusing on – and meeting ESG goals – helps to maximize long-term shareholder value.
There's a challenge in organizations that may view elements of ESG separately and tackle them within silos. For example, you could have a sustainability officer handling climate, the head of diversity, equity and inclusion (DEI) or HR managing DEI, and executive management or the board of directors leading governance. But you need to make connections across those various components and view ESG holistically to overcome obstacles and barriers.
Benchmarking and analytics can paint the business case for change and drive action. When you can aggregate data and use it to provide insights and use analytics to define comparative points against industry data, and then use predictive techniques to define where the industry or an organization is going, you can drive the business case for change and drive behavior changes within your organization.
Virtually everyone is talking about ESG: investors, colleagues and customers, but opinions about what it means for individual organizations can vary widely. Data is critical to understanding how your organization currently stands up against targets and to determining your organization’s appetite for prioritizing ESG. Data can help answer questions such as: What should I be doing? What are my competitors doing, and how do I become market leading? What's in it for my organization as a result? Does it drive better results or lead to more investment support? Does it attract more talent orr better protect my balance sheet?
The reality is that ESG is threaded through an organization to some extent. But when understood properly, it can be a game changer for those who get ahead of it. There certainly isn’t a one-size-fits-all solution or a universal appetite for managing ESG well or at all. And businesses may have other priorities given the pressure they face today amid geopolitical and economic uncertainty.
Sustainable investment is central to long-term investor success. Right now, it is likely an area where there are outsized risks and opportunities, but there’s probably a narrowing window to take full advantage of those opportunities. To have a competitive advantage, investors need either better insights or better ways of implementing those insights − or both.
We'd like to get to the stage where everyone accepts that investing sustainably is just good investment.”Craig Baker | Global Chief Investment Officer
An increasing proportion of alpha – our performance opportunities relative to benchmark – will come from exploiting the inefficiencies around sustainability risks because they are not fully priced into markets today. Investors need to strive to be ahead of the crowd and take action today because these opportunities will decline over time, not least as regulatory changes force more and more asset owners to incorporate sustainability more fully into everything they do.
We’d like to get to the stage where everyone accepts that investing sustainably is just good investment.
Climate change has become a priority boardroom issue. Everyone is aware of the changes in financial regulation, investor sentiment and the general zeitgeist of people seeing how the physical climate is changing in some of the world’s most prosperous and fashionable areas. But with that growing awareness among stakeholders, there is also confusion around the distinction between ESG and sustainability, resilience and risk.
We've translated this nomenclature to help organizations recognize that whatever you call it, at the heart of managing climate change is managing a set of risks. And we are experts at helping companies manage risks.
Managing climate risk requires an evaluation of the full spectrum of future possibilities, good and bad. It's all the same continuum. Risk models, metrics and data are key to helping us transition to net zero. We call this Climate Quantified. From this baseline we can rationally plan how to allocate and locate resources, how to decarbonize, and how to incentivize or disincentivize staff or suppliers.
One of the biggest issues for ESG from a directors’ and officers’ (D&O) liability perspective will be working out how its various social aspects give rise to quantifiable benefits or exposures to the business, because that’s how you persuade companies to address the issue beyond simply saying that ESG is good to have. Convincing them that it’s necessary requires being able to say “this is the cost to your business if you don’t address it” or “this is the benefit if you do.” And quantifying those things is difficult – an area for real focus.
Most ESG risks are things that insurance underwriters are already looking at. And they're not going to go away, even if you stop calling them ESG.”Angus Duncan | Global D&O Coverage Specialist
Most ESG risks are things that insurance underwriters are already looking at. And they’re not going to go away, even if you stop calling them ‘ESG.’ Climate change liabilities are increasing, and there are new reporting requirements that are here to stay. Similarly, everyone is looking at board diversity and now NASDAQ and FCA have board diversity requirements, and the EU is looking at board diversity requirements.
Meeting ESG objectives is not necessarily risk free. It’s a double-edged sword. You can create liabilities for your business and your directors by trying to do things in the name of ESG. That’s why it’s so important to approach it deliberately. There are recent high-profile examples of CEOs who were very pro-sustainability but then had a massive falling out with shareholders who said, “you’re so focused on sustainability, you’re no longer focused on the profitability of the business,” and they had to stand down. If you do ESG the wrong way, you could find yourself in more trouble than if you had not done anything. So you need to carefully consider stakeholder needs – which may not all be in alignment – and be very thoughtful in determining your goals and planning how to go accomplish them.
Boards of directors must take ownership of ESG because investors, employees (and prospective recruits), regulators and customers demand that companies change. Only the board can ensure that such a broad range of stakeholder needs are met. And boards can’t just delegate it. They have to be involved.
Essentially, the board’s role is to ensure companies do well, do good and do right. Doing well means meeting financial expectations. Doing good requires making sure all stakeholders are represented and that the organization benefits society. And doing right means acting ethically and morally responsibly. If boards are not able to do these three things, they will be voted down. We’ve already seen that happen.
But there are steps boards can take to ensure their organizations meet ESG expectations. First, recognize that ESG and corporate social responsibility (CSR) are not the same. CSR is what you do with profits you earn. ESG is how you earn profits. Also, don’t think of ESG as an initiative. Instead ingrain it into your overall business strategy. And start small but think big. Set realistic goals based on data and then make your commitments public to keep the organization accountable.
As I think about DEI as a component of ESG, there are three potential barriers that come to mind: funding or investment, leadership support and meaningful analytics to measure progress – all linked to governance. For funding, DEI is fascinating, as everyone plays a role. A DEI leader may have goals, yet may not have budget. Instead, they often hope that the total rewards leader, the corporate social responsibility leader or other partners factor DEI into funding into their budget.
Second is leadership support. Do leaders demonstrate the importance of DEI through their behaviors, their mindset? Do they lead by example to support a culture of inclusion and belonging? Do they even know that they are critical to DEI and ESG progress or are their actions unintentionally in contrast?
To make real progress, companies need to fund and have governance around all aspects of DEI.”Rachael McCann | DEI Solutions Leader, Health, Wealth & Career
The third potential barrier is knowing the right data to measure progress – and what is not just interesting but actionable? There’s all this data out there, but what often is lacking is using data to tell a story. How did “x” change make an impact? Did it help address a DEI gap? Did it address a goal within our ESG statement?
To make real progress, companies need to fund and have governance around all aspects of DEI – whether it’s people and leaders or other areas like supplier diversity, training, internal and external community connections to name a few. Because when you get DEI and ESG right, you not only enhance your organization’s sustainability, but you’ll also see an impact on talent because people want to work for companies they feel do the right thing by treating people with equity, dignity and respect.
Wellbeing has a close connection to the “S” in ESG through the caring for employees, attracting and engaging talent, and keeping employees resilient so they can be productive and support the business. More and more organizations are tying what they do in employee wellbeing to ESG.
As we see the definition of wellbeing evolve from the traditional focus on physical wellbeing or health to a more expanded view that encompasses emotional and social wellbeing and financial resilience, we recognize that wellbeing touches many different aspects of the work experience, including work and rewards, career, safety and DEI. As soon as you broaden the definition and your approach to wellbeing and embed it into the culture of your organization, you have to engage with stakeholders in the business beyond HR.
Until the onset of the pandemic, there were few conversations around wellbeing at the C-suite level, even with the CHRO. It was viewed as largely a benefits issue. With an understanding of how critical employees are to achieving that balanced view of stakeholders and shareholders, and how employees need to be well to move an organization forward through something like a pandemic or climate change or social inequities – there’s a huge upside to elevating the conversation. Leaders have developed an understanding of how critical wellbeing is to an organization’s success. There’s great opportunity in recognizing how wellbeing connects to the many facets of ESG and how it contributes to success for shareholders and employee stakeholders if you get it right.
When it comes to ESG and climate change, no organization should think about it in siloes. The finance, risk management, HR and other teams need to coalesce around common goals. This can be difficult because there’s often a lack of agreement on many of the fundamental aspects of ESG. For example, ask 10 people to define physical risk or transition risk or even climate change and you’ll get widely different answers.
We also find that organizations often don’t reach consensus on why they need to pursue ESG and climate goals. But training people on ESG and climate – what it means and how to measure it – can help stakeholders with the organization align on how they should approach it. And it can also help them to establish pragmatic goals that are in line with not only their ambitions but also their capabilities.
It’s interesting how differently clients are addressing ESG. Some are all in on one aspect only, while others are taking an expansive approach under a broad sustainability or ESG banner. How far along they are on their ESG journeys varies widely too, with some just starting and others industry-leading.
Though ESG isn’t the same for any two companies, I see some common denominators. Most are performing some kind of a gap analysis. They're trying to figure out where their strengths and weaknesses are within the ESG framework. They're turning that into some version or section of a sustainability plan or they’re refreshing their current plans. Finally, they’re aligning the priorities of the board, management team and leaders who own ESG/sustainability/climate within their organizations.
Clients are embracing ESG and its challenges, and they are using the energy and focus of ESG to manage risks and identify new business opportunities. After business risks, they value the potential to protect and enhance their reputations through their ESG actions. None of my clients thinks ESG is going away.