Risk managers face growing ESG risks

The interconnectivity of ESG risks is creating new challenges that risk managers and their organisations cannot afford to ignore.

ESG has become increasingly important as companies balance their needs with maintaining good governance and being mindful of the welfare of their people.

The risks and challenges are mounting and questions still exist about the priority organisations give to ESG. There is growing concern that these issues are sliding down the agenda as organisations fight for survival in an uncertain world.

The energy crisis and looming threat of recession in many countries are driving short-term focus in many boardrooms. The energy crisis is also highlighting the need for fuel security in the longer term, resulting in many governments turning to renewables and boosting infrastructure development.

However, according to speakers at our recent Risk Frontiers Benelux conference in Antwerp, focused on ‘ESG at the heart of risk management’, held in partnership with Belgian risk management association Belrim and Dutch association Narim, this is exactly the wrong time to reduce the emphasis on ESG.

As activists increase their pressure on companies, and often crucially their insurers, companies are finding they have little choice but to go public with their ESG stance. That pressure is mounting as investors ask tough questions of the board.

However, there are challenges in measuring and reporting on ESG. Many companies freely admit they are struggling to get to grips with this.

“Getting an accurate view of the impact of climate change on your business, for example, is difficult. In fact, the majority of global companies will have at least one asset at high risk from climate change by 2050. And some are not aware of the risks they will face in the future. Why? High-quality data is hard to collect and collate, and there is a lack of access to external insights,” said Jeroen Weurding, head Benelux and Nordics for Swiss Re Corporate Solutions, ahead of the event in Antwerp.

“There are ways to address this by driving value from a digital twin of assets and activities, for example, and pinpointing the exposure of company-owned properties, supply chains and capital assets from climate-related risks, to also achieve TCFD disclosure requirements,” he added.

Experts at the Antwerp conference provided tips on how risk managers can rise to this challenge as more tools emerge to help measure and manage ESG risks.

“Our recent global risk manager survey highlighted that 77% believe they should take a more active role in ESG strategy. However, it is important to define where best to focus efforts, for example by modelling hazards and vulnerabilities in the supply chain using risk models combined with customer, social, economic and asset-level data,” Julien Hornacek, head of ERM and climate transition in Europe at WTW, told Commercial Risk.

“Starting an ESG journey is tough,” admitted one risk manager speaking at the event. “We all have different expectations and much depends on your sector.”

He said companies are likely to be steered by regulatory requirements as well as by pressure from customers and investors. Companies that make a serious effort to engage with ESG early on are likely to gain most, he added.

Legislation is on its way and the EU is developing an ESG taxonomy. “We believe it will be paramount for companies and their directors, and for risk managers and insurers, to keep abreast of the changing and upcoming ESG legislation, as part of their corporate governance,” said Virginie Fremat, Antwerp-based partner with law firm CMS.

“Governance (G) in terms of ESG relates to matters such as stakeholder involvement, transparency and board diversity. It concerns the way companies incorporate ESG in their daily management and reflects the importance of ESG in the corporate strategy,” she continued.

“Adequate governance in this regard, and overall ESG compliance, will become increasingly important to determine how companies are perceived and valued, also within the context of future transactions,” added the lawyer.

And there is mounting legal risk from greenwashing. Companies making ESG claims will have to ensure they are able to deliver on their promises or face the wrath of increasingly litigious consumers and shareholders.

Herman Kerremans, CEO of Howden Belgium, said ESG is also about sustainability and resilience. From an insurance perspective, this means adapting to changing market conditions and ensuring a resilient and relevant insurance market exists.

Kerremans believes the insurance industry has a great opportunity to develop solutions that meet today’s ESG challenges. “My thinking here is the way in which insurers can support major investment projects needed to cope with climate change or disaster relief solutions. They can also develop customised policies that address the new ESG requirements imposed on corporate directors,” he said.

The broker believes the insurance industry will be able to prove that it is still relevant in a rapidly changing world.

“For instance, insurers and brokers do want to be carbon neutral or negative and some no longer want to be involved in providing insurance solutions for polluting industries. However, we also have to ask whether the market as a whole provides sufficient support for investments in renewable energy,” continued Kerremans.

The S in ESG was brought to the fore by Covid-19 and has become a real issue when it comes to recruitment. With so many companies across Europe struggling to find the right people, the way in which companies behave is set to become a big factor in securing the best talent.

Panellists at the Antwerp event discussed what people look for in an employer and questioned whether the risk and insurance professions are keeping pace with the demands of the next generation of employees.

This topic will certainly not go away and is set to become increasingly important for the risk and insurance management community in Europe. Commercial Risk looks forward to further taking this debate on into 2023 and reporting the ESG-related news that matters to our readers.