Analysis
Sustainability Analysis
Define your ESG and sustainability objectives
A well-executed Materiality Assessment is key to defining your organisation’s optimal approach to sustainability. Consider the assessment in terms of how a company’s sustainability disclosure must include information that is likely to have a significant impact on stakeholders’ opinions.
Your materiality assessment should be designed to identify and prioritise the topics that matter most. After all, if an ESG issue is significant enough to be disclosed to stakeholders, the organisation’s strategy must take it into consideration.
Any successful corporate strategy will be multi-faceted. Distinctions need to be made between enhancing the brand through a drive to achieving certified carbon neutrality and, for example, minimising staff turnover or reducing occupational health and safety incidents. It’s perfectly reasonable for some initiatives to be driven by marketing benefits, while others are for financial or altruistic motivations.
There will be considerable disparity between internal and external stakeholders. Internally, the board will tend to concentrate on growth, risk, and similar financial considerations, whereas employees and contractors will rank social factors much higher. External stakeholders, conversely, might prioritise your organisation’s impact as part of a wider supply chain or as a corporate member of a community. You can trust ESG PRO to manage your materiality assessments and to ensure your prime objectives are understood.
Mitigate your corporate risk exposure
Mitigating risk begins with measurement. Reduced to the essential definitions, risk management and risk mitigation are the practices and strategies to reduce potential the adverse effects of a given set of outcomes. It must be recognised too that risks are generally foreseeable to some degree.
Advancing your ESG initiatives can reduce your risk profiles because demonstrating a corporate commitment to environmental, social and governance initiatives helps organisations to win favour from investors, customers, employees, and insurers.
Focussing on risk, in 2021 a NYU Stern School of Business and Rockefeller Asset Management study revealed that “sustainability initiatives drive better financial performance due to mediating factors that include higher operational efficiency and better risk management.”
For corporate insurance underwriters, the prime area of consideration is the review of the risk factors that public companies must disclose under SEC rules. Improved efficiency, sustainability and financial performance also tend to reduce the risk of shareholder litigation, which is a major driver of directors and officers (D&O) liability claims.
ESG risks are real, and they must be identified and managed. While failing to identify, report, manage and / or mitigate can lead to massive costs in the long term, does your corporate risk management team understand ESG and sustainability overall? With ESG PRO, our analysis bridges the inherent gap between the two specialisms. Our assessments are at a particularly granular level to reveal your ESG threats and, thus, inform the board.
Assess your regulatory exposure
The US SEC, E.U. and the U.K are leading with the regulatory enforcement of sustainability, so how exposed is your organisation? Investors and regulators are paying closer attention to ESG activities, and upcoming regulations from the Securities and Exchange Commission and other authorities will require public companies to disclose more information, including specifics on ESG.
Consumer and investor expectations are increasing for companies, including privately held ones, to communicate more about their approaches to ESG, even though they do not have to comply with the same financial disclosure laws as their publicly traded competitors.
The growing prominence of ESG dramatically impacts how directors and officers of public companies define and carry out their responsibilities, beginning with a new corporate governance framework that now must consider this greater group of stakeholders, as well as an evolving regulatory landscape.
The Division of Enforcement’s Climate and ESG Task Force was established, according to a March 2021 SEC announcement. The Task Force challenged claims made in a company’s sustainability reports less than a year after the company’s dam collapsed, releasing toxic waste into the nearby areas. This was the Task Force’s first enforcement action.
Anticipate more regulatory enforcement, as well as associated litigation from share-holder activists. Ponder the impact of the 2022 research which highlighted the disconnect between corporate statement and reality in respect of environmental concerns: 72% of boards declared that their companies would reach their climate goals, even though 43% of them had not yet established a carbon-reduction target.1
Formulate a sustainability strategy
ESG and sustainability overall is a vast topic. Very often, your CSR program forms a sound basis for development, and so for most organisations it is rarely a case of starting with nothing. Your strategy might place fulfilling your organisation’s role in delivering Net Zero, or it may be broader and be targeted at the UN SDGs and, either way, our leadership team can simplify the tasks ahead.
There is a rising expectation that boards of public companies will set and achieve aspirational goals as they are under increasing pressure to proactively manage ESG risks and exposures. As a result, directors and officers may be responsible for a company’s actual or perceived ESG underperformance in comparison to its aspirational goals, its competitors, or both.
Furthermore, declarations that suggest important actions are being made, whether in articles or pronouncements on a company’s website, can be used against organisations whose deeds don’t match their public declarations. Make sure your company upholds any ESG claims it makes and that the evidence backing up those claims is reliable and current.
Your strategy, forged through understanding the inter-relationships of your materiality assessments, risk awareness, and regulatory pressures must be accepted as a challenge to take accountability for the demands of increasingly agitated stakeholders.
You will need a “top-down” approach to drive ESG. Your board, senior executive leadership, and business unit leaders will need advice as to how to create the appropriate governance structure to manage, set, and deliver your ESG ambitions in order to generate the rewards.
1 MSCI, “Three Major Channels from ESG to Financial Value”, citing Chava 2011 20+ studies, both academic and industry, and Deutsche Bank 2012, et al.
2 Gunnar Friede et al., “ESG and Financial Performance”, Journal of Sustainable Finance and Investment, October 201, volume 5, number 4, pp. 210 – 233.
3 Gartner, “The ESG Imperative: 7 Factors for Finance Leaders to Consider”, June 10, 2021.
4 BDO United States, “The Sustainability Edge: Business Benefits of Embracing ESG”, citing 2021 survey conducted by the Chapman & Co. Leadership Institute.
