4 ESG Questions Risk Managers Must Answer
The Danger of ESG Commitments Unaligned with ERM Goals
In recent years, Environmental, Social, and Governance (ESG) concerns have become increasingly important to all businesses and their stakeholders. In addition, major businesses based in the European Union (EU) are gearing up for the introduction of the Corporate Sustainability Reporting Directive (CSRD), which would standardize CSR reporting in the EU. Thus, organizations, top executives, and boards are putting even more emphasis on the need for strong ESG frameworks.
ESG is an important part of many multinational organizations’ growth strategies. Yet, firms risk not “living the talk” by not aligning their ESG commitments with their ERM plan. Therefore, it is crucial for a Risk manager to not only recognize the most significant ESG risks, but also to foresee the potential legal exposures that the business may face.
We have compiled four critical inquiries for risk professionals and management to think about. Risk managers should ask themselves the following four questions about ESG risks:
1. Does your organization take into account ESG risks as its core risks?
The ESG agenda may be a top priority for your organization, and you may have even set some lofty sustainability goals to work toward. Yet, as part of your risk management, have you analyzed ESG Risks in depth and implemented any necessary changes?
When working with ESG Risks, it can be hard to know how these risks might affect your business in detail. A holistic multi-stakeholder approach that uses all components of your sustainability agenda and challenges your risk management framework is needed to acquire a clearer picture.
2. Do you properly handle the “S” and “G” in ESG, or is your company susceptible to social or environmental washing?
ESG efforts may put your company at danger of green or social washing.
Governance (G), an often overlooked but crucial component of the ESG framework, comprises putting in place efficient institutions, roles, and responsibilities to support aspirational sustainability goals and initiatives.
In addition, social and governance issues are typically overlooked in favor of environmental concerns. This causes the S and the G to be obscured, misrepresenting the true nature of the risks involved. The social and governance aspects of ESG are crucial to your business’s social license and reputation among consumers, existing and prospective employees, and society as a whole, therefore neglecting them can be risky.
3. Do the organization’s internal risk frameworks, such as ERM and internal controls, undergo periodic independent reviews?
How does your firm recognize major risks? Do you have a method for identifying risks that is both well-informed and intellectually curious, one that questions conventional wisdom about your company and takes into account crucial industry aspects like sustainability and geopolitical tensions?
Even inside your own company domain, such as your sector, nation, or product region, it can be quite challenging to understand seismic movements. The human mind has a propensity to draw erroneous inferences, apply bias, and extrapolate from the past to present issues in order to facilitate quick and efficient decision-making. Designing a risk identification process that actively involves subject matter experts to provide feedback on some of the most complex difficulties your business is exposed to and employing decision-making strategies that have proved to curb our innate biases and tendency to groupthink processes can help you strike a balance in this cognitive challenge (e.g. the tenth man rule).
4. How do your financial obligations to ESG affect your business? (For example, insurance rates, chances for investors, and financing choices)
The ESG risk management practices of a company have become important not only for investor relations and getting money, but also for insurance companies as part of their underwriting processes. There has been a shift in the way insurance firms evaluate their clients, with some carriers giving preference to clients with well-defined ESG policies and decreasing their exposure to industries and organizations with below-average ESG performance.
Therefore, it is crucial to comprehend your ESG dangers and how to integrate them into your overall risk management procedure when creating and establishing insurance arrangements. In addition to lowering your premiums, demonstrating your organization’s ability to accurately disclose its progress in resolving ESG-related risks can help draw investors, finance sources, and insurance capacity.