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Is Environmental, Social and Governance ...

16 February 2022

Is Environmental, Social and Governance on your agenda?

By Alison Waters ACII Manager – Commercial

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There’s no escaping the global climate, sustainability and socio-economic issues facing companies in a post-pandemic world, and indeed Environmental, Social and Governance (ESG) is the latest hot topic that should be on the agenda for all businesses.

But whilst it’s widely accepted that change is needed now to protect the environment, what about the human aspects of ESG? And whilst we all have an awareness of these high-level topics, what is the actual impact from an insurance perspective of adopting an ESG strategy and how does this impact the perception of an organisation from those looking in from the outside?

Back to basics

Historically ESG was often referred to as Corporate Social Responsibility (CSR). For most, this meant looking at ways of becoming a bit ‘greener’ or ensuring the wellbeing of staff and participation in the odd charitable activity in the local community. But the concept of ESG goes much deeper than that, and measuring the commitment to change over time that companies are implementing is becoming a key metric for Directors and Officers insurers when considering whether they are willing to provide cover.

What does a good ESG strategy look like?

The corporate culture of a business will give a clear picture of how seriously the organisation is taking their responsibilities in devising and adopting ESG policies. Adoption of a clear strategy and open willingness to review and change is essential.

Environmental issues are well publicised and can be easy for a company to demonstrate. But how do the social and governance factors compare? A clear message from the top level of an organisation that permeates down through all ranks of employees will undoubtedly enhance the stability of your workforce and show competitors, investors and potential insurers that it’s a topic that is fundamental to your company’s future objectives.

Buyers and consumers are also becoming more ethically aware, often making conscious decisions to avoid organisations where there are questions around working conditions or environmental pollution, preferring instead to buy from greener companies and those who are committed to ensuring their suppliers are following good workplace practices. A well-publicised ethos can attract new customers, new employees and raise investment potential.

Over time, changes such as commitment to a better waste management strategy or a philosophy to buy from local suppliers will result in reduced overheads and an increased profit margin, so the long-term gains are pretty clear.

Ask yourself this question, does your business align well with the local community and how does it compare with peer organisations? How your business is viewed from the outside plays a huge part in its success.

Why is ESG becoming more important from a D&O perspective?

The main focus for underwriters has always been profitability. Whilst it’s still important that a business is managing its financial affairs properly, ESG decisions made at Board level are likely to become the headline emerging D&O risk for businesses, with the potential for litigation around diversity and equality considered to be one key risk area.

As an example, some high-profile organisations have already faced lawsuits citing a lack of diversity at the Board level which arose as a reaction to the Black Lives Matter campaign.

Perceived poor decision-making during the Covid-19 pandemic may also be a factor, with any allegations that a company was not behaving responsibly by following the strict guidelines, or treating staff fairly around the furlough scheme arrangements could become a difficult area for organisations to defend. The reputational harm that such litigation could do to a business is obvious.

Insurers also want to see examples of proactive risk management. Those where ESG is already part of the DNA of the organisation will be viewed in a more positive light than one that is slow to change. A resilient business that is well placed to sustain future change and where investor and shareholder value is already healthy will undoubtedly attract increased insurance market options, and critically a lower premium than one where there is no ability to demonstrate these vital behaviours.

But one thing is certain, insurers are looking for more detail in their risk assessment for businesses applying for D&O insurance. And they will ask questions about it.

Develop an ESG strategy

Whilst larger organisations might already be ahead in relation to implementing their ESG strategy, it’s equally as important for SMEs to develop a robust and demonstrable ESG policy across a wide range of areas.

Research conducted by Lloyds Bank shows that whilst around two-thirds of SMEs are aware of the need for sustainability and achieving net-zero, over half have no real idea where to begin or how to incorporate it into their business^[1].

Use these points to help get started on your ESG strategy:

Identify – What are the key elements that are core to your policy?
Assess – How will you make the step change necessary to achieve your ambitions?
Prioritise – Are there some quick wins? What is the most important area of focus?
Plan – Decide how and when you are going to tackle each objective and what resources you need.
Implement – Make the changes and involve the right people in getting your ESG programme established into your corporate culture.
Communicate – Ensure the policies are embedded in your organisation from top to bottom and that everyone has a clear understanding of their responsibilities.

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