In this article we discuss the importance of a well thought out ESG strategy, taken from the original article by Alison Waters “Is Environmental, Social and Governance on your agenda?” at Aston Lark.

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There’s no avoiding the global climate, sustainability, and socio-economic concerns that businesses face in a post-pandemic world, and Environmental, Social, and Governance (ESG) is the current hot topic that should be on everyone’s mind.

But, although it is commonly acknowledged that immediate change is required to safeguard the environment, what about the human components of ESG? And, although we’re all aware of these high-level issues, award-winning insurance brokers, Aston Lark, have written an interesting article on what the practical impact of implementing an ESG strategy from an insurance standpoint is, and how this affects the view of an organisation from the outside.

Getting back to the fundamentals

Historically, environmental, social, and governance were referred to as CSR (Corporate Social Responsibility) (CSR). For the most part, this meant looking into methods to become a little “greener,” as well as guaranteeing the well-being of employees and participating in the occasional philanthropic activity in the neighbourhood.

However, the notion of ESG investing is considerably broader, and gauging a company’s commitment to change its environmental criteria over time is becoming an important criterion for Directors and Officers insurers when determining whether or not to give coverage. 

What is a good ESG strategy?

A company’s corporate governance reveals how seriously it takes its duties in developing and implementing ESG investments and policies. A definite approach and openness to adapt are required for the best business strategy.

Environmental concerns are well-publicised and easy to prove. But how do social and governance variables compare? A clear message from the top level of an organisation that permeates down through all ranks of employees will enhance the stability of your workforce and demonstrate to rivals, investors, and potential insurers that your organisation is serious about paving the future for the current ESG strategy.

Buyers and customers are also growing more ethically conscientious, opting to buy from greener firms and those devoted to ensuring their suppliers follow decent workplace standards rather than from companies with issues about working conditions or pollution. A well-publicised corporate culture may attract new consumers, workers, investors and even stakeholder engagement.

Changes such as a dedication to a better waste management plan or a mindset of buying from local suppliers will result in lower overhead and a higher profit margin over time, so the long-term benefits are obvious (besides benefiting greenhouse gas emissions).

Consider the following to mitigate potential ESG risks: Are your business operations well-integrated with the local community, and how do your company affects compare to its competitors? The way people see your company from the outside (especially regarding ESG factors) has a significant impact on its success.

Why is ESG becoming increasingly essential from a D&O standpoint?

Profitability has always been the primary concern of underwriters. While it’s still critical that a company manages its finances appropriately, ESG initiatives taken at the board level are expected to become the most prominent rising D&O risk for companies, with the possibility of diversity and equality-related lawsuits being one crucial risk area.

For example, as a result of the Black Lives Matter campaign, some high-profile organisations have already been sued for a lack of diversity on their boards of directors.

Perception of poor decision-making during the Covid-19 epidemic might also be a problem, with any charges that a firm was not acting properly by following rigorous criteria or treating employees equitably under the furlough programme arrangements being a tough area for companies to defend. The damage to a company’s reputation that such litigation may do is evident.

Insurers want to see a broad range of proactive risk management. Those where ESG strategies are already embedded in the organisation’s DNA will be viewed positively and gain a competitive advantage. With the capacity to exhibit these important behaviours, a firm will be able to attract more insurance market possibilities and ultimately cheaper premiums than one that is not as robust.

One thing is certain: insurers want more details in their risk assessments for D&O insurance. And they will question it.

Creating an ESG strategy

While larger companies may already have an ESG strategy in place, it is equally important for SMEs to develop a robust and demonstrable ESG policy across a range of areas to potentially even pique stakeholders’ interests.

According to Lloyds Bank research, while two-thirds of SMEs recognise the importance of sustainability, climate change and net-zero, over half have no clue where to start or how to implement it within their supply chain [1].

Start with these ideas for your ESG criteria:

  • Identify – What are the policy’s basic elements?

  • Assess – How will you make the required changes to reach your goals?

  • Plan – Are there any fast wins? What is the main emphasis area? Consider the resources you will need to accomplish each goal.

  • Implement - Make the improvements and include the proper individuals in your ESG programme.

  • Communicate - Ensure that the policies are understood throughout the organisation and that everyone knows their roles.

For the full article, visit Aston Lark here.

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