Integrating ESG risks into business strategy

THE need for environmental, social, and governance (ESG) initiatives has never been higher. Companies increasingly need to display their ESG plans or risk losing access to insurance or financing. They are also expected to help advance healthier and more equitable societies through inclusive employee benefits, to attract a diverse workforce.

Against this backdrop, businesses would be advised to adopt transparent and effective ESG initiatives or potentially lose out to competitors that prioritise it.

ENVIRONMENTAL: Supporting the transition to a low-carbon economy

A significant investment in renewable energy is expected in order for countries to meet obligations agreed under the 2015 Paris agreement. Asia is expected to make up 50 per cent of global investments in renewable energy. The opportunities for renewable energy come with challenges, such as new technologies, uncertain regulatory frameworks in emerging markets, the variety of localisation requirements in Asia, and the region's natural catastrophes.

In Asia, 90 of companies rank climate change and ESG issues as important or most important to their organisation, according to the Marsh Risk Resilience Report. The oil and gas industry faces pressures regarding the transition to a low-carbon economy. Many oil and gas companies realise that the conventional "insurance-only" approach is insufficient for their risk management needs, and are seeking advice on more robust risk mitigation approaches like risk engineering, estimated maximum loss scenarios, contractual risk allocation and parametric solutions.

Complying with Task Force on Climate-related Financial Disclosures (TCFD)

Banks are incorporating ESG considerations into their credit reviews, where a defined ESG vision and quantifiable key performance indicators (KPIs) may unlock additional and more competitive financing. For instance, a climate risk strategy helps businesses to identify and quantify impacts with financial and non-financial KPIs. Hence, a clear ESG strategy creates opportunities to access sustainable financing and supports TCFD compliance.

A climate risk strategy helps businesses to identify and quantify impacts with financial and non-financial KPIs. With such data, the organisation can enhance its climate resilience through measures including engineering solutions and supply chain diversification.

Other steps may include determining appropriate reporting standards, identifying and collecting relevant ESG data, and developing board-level ESG risk and performance dashboards. These steps support disclosure and annual report ESG statements.

SOCIAL: Healthier, more inclusive workforce for society

Disparities and inequities for disadvantaged groups have widened the protection gap and posed reputation risks for businesses. The pandemic's duration exacerbated mental health conditions for many. According to Mercer Marsh Benefits, workforce exhaustion and deteriorating mental health are among the top 10 risks. As such, many organisations are reviewing their benefit plans through ESG, Diversity, Equity, and Inclusion (DE&I), and employee relations lenses.

Managing health risks - in part by taking steps to enhance employees' emotional, physical, financial, and social health - benefits businesses in two ways. First, it identifies and mitigates potential health issues and risks early, and reduces the effects of presenteeism. Second, improved employee well-being drives significant gains in performance and engagement.

Many traditional benefit plans often fail to take account of race, ethnicity, sexual orientation, gender identity, income, or country of origin, among other dimensions. Firms should review their plans and introduce benefits that are designed to support all employees, regardless of race, colour, gender, sexual orientation, national origin, and age. Overall, improvements in well-being are estimated to increase productivity among employees by 31 per cent, lower healthcare costs by 41 per cent, and decrease turnover among employees by 35 per cent.

There are further opportunities to align business objectives with social good. Marsh, for example, has collaborated with insurer Chubb, the World Health Organization (WHO) and the Vaccine Alliance (Gavi) to secure insurance coverage for the Covax programme, offering eligible individuals in 92 lower-income countries and economies a fast, fair, and transparent process to receive compensation for rare, but serious, adverse events associated with vaccines.

GOVERNANCE: Deciding sustainably

The pandemic induced stakeholders to scrutinise business continuity planning (BCP) and cyber risk management of businesses. The pandemic's impact to supply chains is a reminder to have contingencies ready and to use BCP to minimise and mitigate further losses. Regular reviews and exercises of business continuity management plans are necessary to ensure they remain effective.

A business's resilience is reflected in its ability to anticipate important risk issues and connect risk management to long-term growth strategy. However, the Marsh Risk Resilience Report found that only a quarter of businesses have a comprehensive process to model the impact of emerging risks. Organisations must identify and prepare for systemic and emerging risks to build resilience and foster competitive advantage.

Cyber threats are pervasive and accelerating, costing global businesses billions of dollars every year and creating exposure across almost every aspect of an organisation's value chain. For example, the average business interruption outage from a ransomware attack now exceeds 20 days, with ransom demands for more than US$1 million commonplace. According to Marsh's work on resilience, only 18 per cent of companies say they are highly prepared for cyber risk, despite the resources organisations are committing to combat it. Organisations are in prime positions to thrive if they can quantify the economic costs of cyber exposures and optimise investments in risk mitigation and transfer.

UNDERSTANDING AND MANAGING ESG RISKS

The United Nation's Principles of Sustainable Insurance highlight the need for companies' core Enterprise Risk Management (ERM) assessment framework to be integrated with material ESG risks as the risks, if left unaddressed, can result in significant financial losses.

ESG risk management entails identifying and quantifying the business's risk aggregation and interdependencies across the value chain to help ascertain the degree of contingent business interruption risk. This process includes a gap analysis assessment against best practice ESG criteria and a review of governance documentation and data to help businesses determine how much stress it can withstand and at what points in the value chain. This can guide early decisions to help evaluate counterparty risk and have a comprehensive view of existing and forward-looking ESG risks and their financial impacts.

This assessment helps develop an understanding of an organisation's current ESG maturity and leads to better informed risk decision-making, the execution of ESG objectives in line with risk appetite, the integration of practices within proven ERM and resilience frameworks, as well as enable the organisation to meet requirements for external reporting.

Ultimately, it is imperative for organisations to have a trusted advisory partner to support them in the alignments, assessments and risk management solutions as they quantify and measure ESG progress.

• The writer is chair of Marsh ESG committee, Marsh Asia