Reputation risk and ESG

When it comes to ESG, there are considerable reputational risks that an organisation can face, whether through inaction or inappropriate action. Inaction over the environment, or modern slavery or employee discrimination can, of course, lead to damaged reputation with huge financial implications. But equally, some actions, however well-meaning, can also lead to reputational damage, especially with greenwashing or even ‘wellbeing washing’.

Reputation risk is certainly becoming a boardroom concern rather than just a public relations issue. In 2023, WTW surveyed some of the world’s 500 largest companies, revealing that 26% of companies had reputation in their top three risks (in the 2021 survey it was 18%) and a top five risk for 55%.

But accountability for reputation risks has fallen, according to the survey, and while a majority of businesses have a formal governance process for reputation risks including ESG, only 14% linked this to board level KPIs in 2023, down from 23% in 2021.

Managing these reputation risks is all about having the right corporate structure, governance, and business processes, according to David Bennett, senior director, direct and facultative, WTW. He says it is important to ask a series of questions around this:

1. How often are reputation and ESG issues covered in board oversight activities?
2. Do companies have formal or informal processes that deal with these areas:

• Governance process for reputation and ESG;
• Organisational structure process for allocating responsibilities for reputation and ESG;
• Process to inform/update board/business owners and management on reputation and ESG issues;
• Process to monitor and ensure progress is being made in the company’s approach to reputation and ESG?

3. Are all of the above measured by KPIs and linked to board remuneration?
4. What level of assessment has your company completed to understand the strategic and financial impacts of reputation and ESG to the business?
5. What level of integration has your company conducted to ensure reputation and ESG is included in your overall risk management processes?

Bennett says that if all of the above are generally answered positively, then it’s likely all the relevant functions are working together in critical event management, escalation processes and crisis management planning. But he adds that it is very important to remember that crisis communications is not strategy, and he quotes the Harvard Business Review: “Crisis communications is not risk management, it is damage limitation.”

New risks

WTW’s reputation survey noted that with increasing regulation, such as the EU’s Corporate Sustainability Reporting Directive, which will require companies to disclose and audit data on their impact on the environment and society, pressure to prove ESG credentials has become critical in business deals and is only likely to grow.

And greater corporate engagement with social media channels is likely to make reputation risk even more difficult to manage. Bennett notes that the latest reputation survey found that the preferred platform for the c-suite has changed from LinkedIn to Facebook, but the regularity with which the c-suite post has fallen, perhaps reflecting that they were more comfortable talking to their peers on the business platform of LinkedIn rather than the more consumer platform Facebook.

He says the way in which companies use social media platforms is important. “Are the c-suite using the various platforms to engage in conversation with their customers, are they sharing their views and giving their own thoughts? This helps them appear more human, develop relationships and build up trust. So when something does go wrong and they have to stand up in front of the cameras or post on social media sites to explain what happened and perhaps say sorry, they’re more likely to be believed and forgiven. Some unknown CEO who is rolled out in front of the cameras will most likely come across badly,” says Bennett.

As for greenwashing, companies are now being pulled up by regulatory and legal challenges around greenwashing and then this is getting picked up in the media and across social media, says Bennett, adding that as legislation and regulation crystalises, there are fewer excuses around lack of clarity for companies to hide behind.

And the risks around greenwashing, or being accused of it, has led to the new trend of green hushing, where companies who are afraid of saying the wrong thing under report, under communicate or say nothing at all on sustainability issues, Bennett notes, resulting in very important issues not getting the profile and exposure in the media and across social media that they need.

Insurance

While there are a lot of insurance products available to mitigate reputation risk, Bennett is not overly impressed with what is on offer. “There’s a lot of product out there that has either one or two elements that are not quite right or lacking something,” he says. “That’s probably the biggest challenge for markets/brokers trying to create a new market based along traditional product lines. So it’s either a traditional insurance product that might not react in real time or there is just is not enough capacity to provide meaningful cover.”

He says existing products like ‘all risk’ or parametric can be truly innovative, but they also have a couple of downsides. “Deals can be more complex, meaning it can take more time to place and the wording is open to interpretation. Which might not give you the certainty you need at a time when reputational damage is hitting your revenues. You need a solution that you know will deploy immediately and without any conditions attached. And it’s the old chicken and the egg… insurers want premium and companies want capacity,” says Bennett.