ESG: An elevated role for risk managers

ESG is a huge opportunity for risk managers, and brokers are there to help, according to Tracie Thompson, global head of ESG and climate for Aon’s Commercial Risk Solutions team. Tony Dowding, editor of ESG Risk Review, talked to Thompson about growing awareness of ESG risks, opportunities for risk managers to take the spotlight, the role of the broker, and how data is key.

Is industry awareness of ESG risks growing?

Tracie Thompson: Very much so. Some industries are further ahead and there are also some interesting geographical differences as well that seem to impact where clients are in their ESG journey. For example, broadly speaking, clients operating or domiciled in the UK, and certainly across the EU with EU legislation around ESG and disclosure requirements, are slightly ahead of clients in the US, where disclosure requirements differ, and the political environment can impact an organisations’ activities.

Is there more of an awareness on the environmental side of ESG or is it broader than that?

Thompson: There is certainly a heavy focus on the E of ESG, but we are also seeing a slight shift, even in the last three months, in the conversations we’re having with clients and insurers on the S, for example on D&I and workforce policies and on the G. The governance part is evolving to become a bit more specific about evidencing what a business is doing and demonstrating the commitments the client is making beyond the insurance industry – to regulators and their multi-stakeholder base.

Is ESG the chance to (finally) put risk managers in the spotlight?

Thompson: It is a huge opportunity for risk managers. I recently spoke to a risk manager about how they can start getting more involved, what are the questions they need to ask, and who from the firm do they need to bring into the room as they think through how they are going to evidence some of their ESG commitments to insurers. Because insurers are certainly putting more focus and scrutiny on ESG.

The role of the risk manager is forcing brokers and insurers to change the questions they are asking and how they engage with clients. Because suddenly, instead of just asking risk managers for a statement of values for their physical assets (for example), we are asking them questions around sustainability.

For these clients to answer confidently, we have a role to play to guide them as to who best to bring into the room as they present their risk to insurers. It’s a great opportunity for individuals in those roles to become more integrated within their own organisations, and to become more instrumental as to how they think about risk and capital.

This is also an opportunity, in some circumstances, for the risk manager to shift from an insurance buyer to a true risk manager. These ESG conversations will provide them a better platform within their organisation to really be part of, and included in, the conversation around risk.

Part of the role of the risk manager will be to engage with sustainability managers, HR, legal etc to create a holistic approach to ESG risks. How much of a challenge will this be?

Thompson: That’s where that kind of connectivity comes, because when we think about ESG it really brings together the human capital piece and the risk capital piece. When we talk about P&C insurance, it is often about assets and liabilities, and HR is very much to the side and can even have different insurers. So it is bifurcated just by the nature of how we think about the placements. As the company thinks about ESG, it does bring forward that human element. I think it better positions the organisation to be able to present its risks in a holistic way to insurers.

If you think about a holistic ERM type framework, it’s all the risks to the organisation. I firmly believe that having ESG as part of your holistic enterprise risk management framework is going to be extremely important.

What is the role of the broker in all this?

Thompson: The role that brokers (and carriers) have is to provide risk managers with the tools and resources to have the right conversations. And to be a guide – risk managers are being asked a lot of questions around sustainability, and they are looking for guidance on the right place to look for answers, and then how those answers can be delivered in a way that works for the underwriter. It’s going to be an opportunity for the whole industry to educate each other, but certainly for the risk manager I see it being an elevated role within an organisation.

As brokers, we are here to support clients and help them make better decisions. When we talk to clients and they have big ESG commitments, it is about helping them to best demonstrate what they are actually doing internally. And that process will be a lot more than just a pre-renewal meeting three months ahead. It will take a lot more time and that’s probably going to be a bit of a learning curve, getting people comfortable that renewals and placement discussions will need to begin six to 12 months beforehand.

Data seems to be key for both reporting and purposes as well as in managing the risk, but how easy is it to obtain that data?

Thompson: There are challenges around data. Everyone in the value chain is thinking about what data is needed and what is the purpose of that data, and how is it going to be used. This topic is bringing the risk capital providers closer to their clients, and that is a positive. We can discover a lot of the public data but nobody tells a better story than the client, and we need that public data evidenced by what the client is actually doing internally.

And in terms of data from reporting requirements, where it is from other parts of the business, it is about closing the gap between the different divisions within an organisation, whether it’s governance or legal or financial reporting, and making sure that data finds its way to other types of capital, such as risk capital.

How important is it for brokers (and insurers) themselves to be at the forefront of sustainability?

Thompson: Each insurer and broker, will have their own ESG commitments. Clients are asking about their ESG commitments because they must measure their entire supply chain. It is a new and interesting place, and one that is here to stay.