What ESG means for insurance risk management

In today’s values-driven marketplace, businesses must rely on more than just numbers to make their mark. They are held accountable by all stakeholders, including employees, clients, community members and shareholders. Companies that showcase the values behind their results are the ones that will cut through the noise. 

Gone are the days when stakeholders were satisfied with a well-intended mission statement; people want to see proof of action behind each word. Topics that were once considered taboo are now a selling point to customers. According to a Shandwick study, nearly half of millennials value a CEO who takes a position on social issues. 

An increasing number of CEOs are choosing to release an Environmental Social Governance (ESG) report to show stakeholders that they are steadfast in following through on their promises and are often met with praise for this transparency. In fact, a SHRM survey found that 46% of Generation Z and 55% of Millennials said ESG is important to them. It will behoove CEOs to pay attention to these studies, as it is anticipated that millennials will account for 75% of the workforce by 2025. 

Showcasing your values (literally) pays off. About 89% of investors considered ESG issues as a component in their approach as of 2022, with 60% of surveyed executives at organizations with ESG strategies reporting their ESG report positively impacted retention, with even more saying it impacted their recruitment. 

The value
Beyond the benefits that come with reflecting the marketplace’s values in your company, releasing an ESG report prepares you to address potential risks hidden in operations. Therefore, as an insurance consultant, I highly recommend companies release an ESG report, even if it is not required of them. 

At its core, ESG reporting is a form of risk management. When developing an ESG reporting framework, every facet of a business must be evaluated on an annual basis. When doing this in-depth analysis, gaps and areas of opportunity will likely shed light on areas of improvement. 

This is how you identify the true risks your business faces, and you can then use this information to inform and develop strategies to mitigate those risks. By implementing these strategies, you may improve financial performance and ultimately see a better ROI, which can have a positive impact on your bottom line.

Assessing risks 

From a risk perspective, each element of ESG can be broken down into the following:

Environmental – This represents how well environmental risks are managed. With the rise of natural disasters, ensuring you have the right policies in place based on your environmental risk is critical. In the first half of 2021, disasters inflicted a staggering $42 billion in losses covered by insurance—the highest ever.

Social – Employee development and wellbeing, pay transparency, DE&I and labor practices, just to name a few, are all things that should be considered under the social category. To mitigate social risks, reflect on the effectiveness of the employee wellness programs you offer, and take a stance on your company values. Reportedly, 90% of millennials would take a pay cut to work for an organization that aligns with their values.

Governance – This outlines the internal business practices that the company adopts to govern itself. Among the three ESG elements, governance risk is usually considered the most imperative across industries. The most pertinent risks that fall under governance are cybersecurity and business policies. Have a practice plan in place to mitigate Ransomware attacks. Additionally, report your economic performance to your board annually so they can be involved in setting the company priorities. 

Leveraging transparency 

ESG reporting as a risk management tool has risen in popularity due to the personal nature of each ESG report. No two ESG risk strategies are the same. Why? A critical part of developing an ESG report is conducting a materiality assessment.

The materiality assessment process identifies the ESG topics most critical for your company’s success. The insights gained from this assessment are precious to the C-suite, as it involves ascertaining what stakeholders believe to be essential for the business to thrive. This gives leaders a clear view of stakeholder expectations, allowing for more efficient risk assessment.

MJ Insurance released its first ESG report this year. During the process, we discovered that corporate governance measures were among the most critical elements to our success, specifically as it relates to cybersecurity. Once you have an assessment of materiality of each element in your company, you can construct a strategy of risk management. This gives you the opportunity to highlight how you manage your company’s risks, reassuring investors that you are diligent in your operations. 

The vulnerability of an ESG report is exactly what makes it such a powerful tool for building trust. It is a rare opportunity to view your company in the eyes of the stakeholders, and outlines the steps needed to protect your company through potential risks. 

Though daunting, I encourage you to view ESG reports as a lighthouse that guides your operations and helps employees, customers and investors whose values align with yours to find you.