ESG—three letters with big implications. In today’s world, businesses aren’t just held accountable by their shareholders and investors. We live in a society where the public’s perception of your business has a huge impact on your bottom line.
In a value driven marketplace, business leaders are held accountable by all stakeholders. This includes employees, clients, community members and of course shareholders. It’s imperative to know what ESG means for your business, your bottom line and your risk management strategy.
WHAT IS ESG REPORTING?
In the media landscape today, ESG has become a hot topic for businesses. However, opinions on its importance and company mandates are divided. So, rather than wading into the noise, we are breaking down each element and its related risks so you can make an informed decision.
ESG reporting, (Environmental, Social and Governance reporting) discloses information on a company’s environmental, social and governance performance. This type of reporting shows a company’s commitment to do more than make a profit.1
- Environmental: How well environmental risks are managed.
- Social: Employee, community and/or client relationships that affect the company’s bottom line.
- Governance: Internal business practices that the company adopts to govern itself.
At its core, ESG reporting is a form of risk management. When developing an ESG reporting framework, every facet of a business must be evaluated on an annual basis. When doing this in-depth analysis, gaps and areas of opportunity will likely expose themselves.
This is how you identify the true risks your business is facing. You can then use this information to develop strategies to mitigate those risks. By implementing these strategies, you may improve financial performance and ultimately see a better ROI, which can have a positive impact on your bottom line.
WHAT IS ESG RISK?
ESG reporting as a risk management tool has risen in popularity due to the personal nature of each ESG report. No two ESG risk strategies are the same. Why? A critical part of developing an ESG report is conducting a materiality assessment.
The materiality assessment process identifies the ESG topics most critical for your company’s success. The insights gained from this assessment are precious to the C-suite, as it involves ascertaining what stakeholders believe to be essential for the business to thrive. This gives leaders a clear view of stakeholder expectations, allowing for more efficient risk assessment.
HOW CAN YOU USE YOUR MATERIALITY ASSESSMENT TO MANAGE ESG RISK?
Let’s use MJ as an example. When creating our ESG report, we assessed and found that our corporate governance measures were among the most critical elements to our success. This meant cybersecurity was a risk for our organization, and we needed a strategy to ensure strong cyber practices.
The materiality assessment also helped us understand where we should focus only minimal resources. For MJ, our environmental risks were not the most material. While we’ll still progress in this area, it is not the primary focus of our time and resources. Instead, our focus is on the critical topics identified in the materiality assessment, allowing us to develop effective strategies for managing our ESG risks.
ESG RISK MANAGEMENT
Risk is crucial component investors consider when evaluating your business. By incorporating ESG reporting into your strategy you can highlight how you manage your company’s risks. This reassures investors that you are taking steps to mitigate the risks that could affect your company’s long-term success. Let’s break down the three elements and the different risk mitigation strategies under each ESG factor.
This is the area that receives the most attention in correlation with the push for climate change. Environmental risk can be a crucial concern not only for investors, but also customers and employees. Again, this is where your materiality assessment will help you determine where to prioritize your focus.
Energy and resource-intensive industries have a higher risk tied to environmental impact. However, environmental risk encompasses a wide range of areas, including greenhouse gas emissions, environmental liability coverage, waste management and office energy usage.
- How do I mitigate my environmental risk?
- Stay up to date on the current rules and regulations regarding environmental reporting. The SEC currently has a proposal to require all publicly traded companies to begin reporting on their environmental impact.2 Many cities, states and municipal governments across North America have passed utility benchmarking ordinances, requiring buildings to track and report their annual energy and water consumption.3
- Evaluate your environmental liability coverage. With the rise in natural disasters, ensuring you have the right policies in place based on your environmental risk is critical. In the first half of 2021, disasters inflicted a staggering $42 billion in losses covered by insurance—the highest ever.4
Social risk is an area of ESG issues that business leaders should not and cannot ignore. Elements of risk in this category are employee development and wellbeing, pay transparency, community impact, labor practices, DE+I practices, responsible supply chain measures and health and safety just to name a few. Although these elements might not appear to be critical to your bottom line at first glance, they are becoming increasingly important in an environment hallmarked by “great resignation” and “rage applying.”
- How do I mitigate my social risk?
- Evaluate your employee benefits and work conditions. Are you providing a fair and equitable wage that is current with market trends? Are you providing wellness resources to your employees? These are small things that have a big impact on your bottom line. Social elements tend to be critical from an attraction and retention perspective.
- Take a stance on your company values. Work with strategic partners that align with what your company stands for. Reportedly, 90% of millennials would take a pay cut to work for an organization that aligns with their values.5
Governance risks often include various factors such as cybersecurity and business policies and stances. When evaluating these elements companies must navigate compliance and regulations specific to their industry. Among the three ESG elements, governance risk is usually considered the most critical, regardless of the industry.
- How do I mitigate my governance risk?
- Evaluate your cybersecurity efforts. According to estimates from Cybersecurity Ventures, a new Ransomware attack took place every 11 seconds in 2021.6 Ensure you have a cyber plan in place to protect against this risk.
- Measure your economic performance and report to the board annually. Board involvement and buy-in is critical to true risk mitigation across the various ESG elements. The board typically helps determine where the company should prioritize its focus based on the company’s current economic performance.
HOW DOES ESG REPORTING AFFECT MY BOTTOM LINE?
ESG reporting can have a significant impact on your bottom line. According to a study by McKinsey, 70% of companies have seen a positive relationship between their ESG program and financial returns.7 In fact, 80% of investors believe ESG risks are an important factor in investment decision making.8
Given our discussion of ESG this likely comes as little surprise. After all, ESG reporting is a risk management tool that identifies areas of opportunity for your business. So, in the interest of financial performance and attracting more investors, incorporating ESG reporting into your strategy is often smart choice.
HOW CAN MJ HELP?
Looking for assistance to mitigate the ESG risks identified through reporting? MJ is here to help. With our compensation consulting, risk management and cybersecurity offerings, we are strategically positioned to assist in protecting your bottom line and mitigating your ESG risks.
- Tine Thygesen. “Everyone Is Talking About ESG:What Is It And Why Should It Matter To You? Forbes.com. Retrieved May 12, 2023. Https://www.forbes.com/sites/tinethygesen/2019/11/08/everyone-is-talking-about-esgwhat-is-it-and-why-should-it-matter-to-you/?Sh=58fa62fd32e9
- “Climate and ESG Risks and Opportunities” SEC.GOV. Retrieved may 12, 2023 https://www.sec.gov/sec-response-climate-and-esg-risks-and-opportunities
- “benchmarking Compliance” ESG.Conservice.com. Retrieved May 12, 2023. https://esg.conservice.com/benchmarking-compliance/
- Umair Irfan. “The $5 trillion insurance industry faces a reckoning. Blame climate change.” Vox.com. Retrieved May 12, 2023. https://www.vox.com/22686124/climate-change-insurance-flood-wildfire-hurricane-risk
- Nina McQueen. “Workplace Culture Trends: The Key to Hiring (and Keeping) Top Talent in 2018”. Blog.Linkedin.com. Retrieved May 12, 2023 https://blog.linkedin.com/2018/june/26/workplace-culture-trends-the-key-to-hiring-and-keeping-top-talent
- Steve Mogan. “Global Ransomware Damage Costs Predicted To Reach $20 Billion (USD) By 2021” cybersecurityventures.com. retrieved May 12, 2023. https://cybersecurityventures.com/global-ransomware-damage-costs-predicted-to-reach-20-billion-usd-by-2021/
- “Why ESG is here to stay” McKinsey.com. Retrieved May 12, 2023. https://www.mckinsey.com/capabilities/strategy-and-corporate-finance/our-insights/why-esg-is-here-to-stay
- James Chalmers, Emma Cox and Nadja Picard. “The economic realities of ESG” Pwc.com. Retrieved, May 12, 2023. https://www.pwc.com/gx/en/services/audit-assurance/corporate-reporting/esg-investor-survey.html