Environmental, social, and governance (ESG) is already on the radar of most companies. The acronym is often seen on corporate websites, annual reports, and press releases, demonstrating that businesses are eager to engage – and to be seen to be engaging – with ESG as a whole.
ESG-related issues are a growing priority for governments and legislators, too. They were high on the agenda at the delayed World Economic Forum (WEF) meeting in Davos in May 2022. The complex question of how to tackle ESG issues at the same time – to both protect the environment while simultaneously fostering healthy societies and growing economies – was also one of the major themes of the WEF’s Global Risks Report 2022.
Turning Words Into Action
The problem companies face is therefore not one of awareness, but of action. Many businesses are genuinely committed to engaging with ESG issues. But what are the next steps they should take? And how can they make meaningful (and measurable) improvements in each of these three key areas?
One common obstacle is a lack of clarity, data, and rigorous analysis of a company’s actual ESG performance. This often starts with an overemphasis on environmental issues and a relative lack of focus on social and governance issues. As a result, the E overshadows the S and the G, distorting the true nature of the underlying risks.
ESG Risk Management In 5 Steps
Adopting a stepwise approach to assessing and mitigating ESG risk makes the process more manageable.
1. Create a baseline
The first step towards improving your ESG risk rating is to establish a clear baseline of current performance. Only once you have a clear understanding of where you stand can you figure out where you need to go. Evaluation should be based on a comprehensive set of ESG themes, ranging from “Climate Change” and “Biodiversity and Nature Loss” to “Dignity and Equality”, “Ethical Behaviour”, and “Skills for the Future”. Also take into account different industries and the relative importance of different ESG themes in different sectors.
2. Use a risk register to inform stakeholders
Once you have your benchmark, you can create a formal ESG risk register, which can be developed through gap-analysis exercises and expert-led workshops. A risk register should highlight ESG-related risks, such as potential future disruptions to your supply chain, while also highlighting how ESG issues could feed into and amplify other corporate risks. In the fashion industry, for example, ESG concerns are likely to be significant drivers of reputational risk. The risk register then becomes a formalised way to inform and advise leadership and other stakeholder groups about the ESG risks and opportunities currently facing your company.
3. Measure and model
The next step of the process is to use quantitative data to provide a deeper analysis of your company’s exposure to ESG risk. This requires the measurement and prioritisation of the potential risks ESG-related issues could pose to your business and its supply chain. Supply chains are a crucial area to model in this way because they can create significant ESG risks for your company. For example, if one of your suppliers is publicly accused of adopting forced labour practices or being involved in modern slavery, this is likely to create serious reputational and financial risks to all the businesses within its supply chain, including yours.
4. Reporting, adaptation, and resilience
Regular and robust ESG reporting is now increasingly required to satisfy internal and external stakeholders, and to comply with the reporting requirements (both mandatory and voluntary) of bodies such as the TCFD. There’s no such thing as a one-off report or simple badge of attainment. You need to ensure your response to ESG risk is flexible and adaptive.
5. Reducing ESG risk
The final stage of the process is to adopt a series of medium- and long-term strategies to reduce your company’s exposure to ESG risk. By initiating an ongoing process of ESG measurement – and improvement – within your company, your company will improve its ESG performance (and rating) over time.
Marsh recently launched an innovative ESG Risk Rating tool. Free to use, the self-assessment acts as both a spur to action, as well as a blueprint for ongoing improvement, as it gives your company a quantitative Risk Rating Scorecard that can be shared with stakeholders, plus data-led insights and practical recommendations for improvement.
