Environmental, social and governance (ESG) issues are gaining more attention at the highest levels of organizations around the world. A recent Aon survey found that the ESG-related topics such as relevant regulatory changes, workforce shortages and climate were among the top 10 risks for business leaders. It is critical for organizations’ boards of directors and leadership to look for better ways to proactively manage their approaches to ESG to articulate their strategy from a position of strength and avoid potential litigation, regulatory penalties and reputational risk.
“There’s vulnerability for companies from all areas of risk, including financial, people-related, reputational and litigation, but with the right approach they can address their ESG risks in a way that protects and grows their business, and benefits society,” says Patty Errico, partner in the Corporate Governance and ESG Advisory practice at Aon’s Human Capital Solutions.
Now is the Time to Face Risks
In general, corporate oversight of ESG, as well as companies that invest in funds and companies that focus on ESG, have received greater attention and scrutiny in recent years. One reason is a decrease in annual ESG equity funds1, largely due to macroeconomic factors. In the U.S., criticism of ESG topics has caused some state pension funds to raise concerns about certain companies and investors2 with highly visible ESG activities. On the other side, scrutiny of potential corporate “greenwashing” continues.
These developments aren’t derailing companies’ investment and commitment to ESG. Instead, they are causing organizations and investors to get more precise about risks and opportunities — stressing the need to focus on the data and metrics used to measure material factors.
“While the language of ESG may evolve from this movement, the underlying risks are here to stay — and they are growing in urgency for companies to address,” says Aria Glasgow, head of North America ESG and Corporate Governance Advisory practice at Aon’s Human Capital Solutions.
The current environment makes it even more important for companies to have a thoughtful approach to ESG that’s communicated clearly to stakeholders. It should also align to organizational culture and be integrated into decision making.
When making ESG disclosures, organizations should consider communicating with the right level of detail, weighing short-, medium- and long-term risk, says Errico. “For example, disclosing a goal to reach net zero by 2040 is so far in the future. You should think about the level of detail you need to disclose today to satisfy investors that you will reach that goal.”
ESG needs to be integrated into a company’s enterprise risk management framework — a reality that is not being met by many organizations, says Tracie Thompson, head of ESG and climate for Aon’s Commercial Risk Solutions. For example, as insurers and regulators further scrutinize the physical and transitional risks of climate change, companies need to demonstrate a credible risk management process as they would for all risks.