Why ESG matters for risk managers

ESG – it’s quite the buzzword and evokes a range of reactions from necessity and reality to ‘wokery’. But leaving aside politics and ideology, it is clear that ESG is an important issue for corporates and one that cannot be ignored.

But at the same time, there is a huge amount of confusion about ESG. What does it actually mean? Where has it come from and why does it matter? Part of the confusion is that ESG came from the investment world. It was three areas that investors should consider closely: environment, social and governance.

But in its current terminology, ESG has come to mean something much more. It is about sustainability, both in terms of a company being sustainable in the face of outside risks and contributing to sustainability in terms of a firm’s impact on the wider world. It is much more than just compliance and reporting.

For ESG Risk Review, we use ESG in its wider sustainability sense. And for that reason, we do not split the topics separately into environment, social and governance. For a start, they often overlap, and it tends to add to the confusion around the topic when you start trying to identify whether a risk is related to environment, social or governance.

We at ESG Risk Review prefer to focus on three areas of news and analysis: regulation, litigation, and the insurance sector. We believe these are the areas of interest for risk managers when it comes to ESG issues.

As one leading sustainability risk expert explained to me recently, it is not so much that there are new specific ESG risks. It is that ESG and sustainability issues, whether it be climate change, loss of bio-diversity, renewables, diversity and inclusion, or human rights, to name a few, have an impact on a corporate’s existing risks, and that is what needs to be managed.

So to go back to whether ESG is just a buzz word or ‘wokeness’ or political correctness gone mad: does ESG matter? Well, there are a lot of opinions out there. But one caught my eye recently. It looked at the economic costs of ESG and came to an important conclusion: “ESG doesn’t hamper a company’s ability to boost the bottom line. That myth provokes poor business decisions.”

The research insight from IBM’s Institute for Business Value, The ESG Ultimatum: Profit or perish, stated: “Contrary to popular opinion, we found that ESG and profitability are not at odds. Top-performing companies don’t make trade-offs between sustainability, social responsibility, good governance, and shareholder value; they achieve all these outcomes at once. The argument that ESG hampers a company’s ability to boost the bottom line is more than a myth ­– it’s misinformation that leads to poor business decision-making.”

It goes on: “The key is to see ESG as a transparency enabler. When viewed as a vehicle for driving business value – rather than a narrow reporting exercise – ESG generates insights that create opportunities and boost performance.”

And that is another important element. For risk managers, it is not just about managing risks, but sensing where there may be opportunities to enable business and add value.

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