Risk Managers to the fore on ESG

ESG and broader sustainability issues have come to the fore and Penny Seach, notes that consumers, business partners, and regulators are increasingly expecting organisations to have in place tangible, concrete measures that show they are part of the solution, rather than a contributor to the environmental, social and governance challenges that threaten our planet and society.

While there may be sustainability managers or others with similar roles who are tasked with addressing these topics, risk managers are being called on to play an important role.

Risk managers and sustainability managers have a common objective, according to Seach. “Both have the aim of protecting people, property or assets, and the environment; so the process that a risk manager relies on to identify, assess and mitigate risks is similar to the process that will be used to understand ESG related issues.” She points out that, as with risk management, sustainability is about doing the right thing while adhering to corporate ethics and protecting the organisation’s reputation.

So, what is the value risk managers can bring from a sustainability perspective? “The way that risk managers look at risks within the organisation is very structured. They create a strong framework and they have a very detailed view of the ‘pain points’, whether that is in their own processes or their supply chain,” Seach says.

This means risk managers can play a vital role in not only managing risks but identifying opportunities through a proactive ESG strategy. “With an inherent way of thinking about risk exposure as well as the detailed knowledge of operations and the value chain, they are in a strong position to play a key role in identifying sustainability-related risks and what they mean for the business, its people, and the community.”

Seach notes that organisations should be conducting a materiality assessment of ESG-related issues and identifying those that are key to their own business. This means looking at more than issues related to their own operational processes, but also those that are important to their stakeholders. “That's where the ESG assessment comes in - considering stakeholders such as employees, customers, communities, investors and society at its broadest level,” she says.

Seach highlights the importance of the governance aspect of ESG: “All three of the E, S and G are interlinked by the G. That's where the strength of the risk manager comes in, bringing effective measurement and management of risk, along with oversight and governance, which provide insight into the E and the S of ESG.”

So, what are the key ESG issues for risk managers? ESG and sustainability drive an array of risks and opportunities for companies which will vary according to industry sectors and individual businesses, but there are, of course, generic themes or considerations, irrespective of industry.

Perhaps the most obvious of these is climate change, which Seach says is marked by increasingly frequent and severe large and ‘secondary’ natural catastrophe events. She notes that Zurich is seeing what were once considered minor losses becoming larger, seasons becoming longer, and the geographical spread of catastrophe events expanding. She refers to industry reports that estimate natural catastrophes caused around $125bn of insured losses in 2022, after $121bn in 2021. “We've already seen ~$20-25bn of insured losses in the first quarter of this year and ~$10bn of that came out of the U.S. from severe convective storms,” she says.

Another key ESG consideration for risk managers is directors and officers’ liability, particularly in relation to climate litigation. Disclosure, diversity and inclusion and employee wellbeing are also under increasing scrutiny from investors, regulators, shareholders and other stakeholders, and Seach says Zurich believes the landscape for these risks will continue to evolve over the next 10 years. Whilst some elements of this may be outside the scope of a risk manager’s role, they may be able to provide valuable insights or access to data that could be leveraged to support the business in managing these topics.

Of course, ESG risks have implications not only for the leaders of an organisation but for the workforce itself. Employee wellbeing in general is very much within the remit of ESG considerations and an area where a risk manager will also have important insights, Seach says.

From a physical risk perspective, any form of natural catastrophe will likely have an impact not just on operations, but on people as well. This necessitates “thinking more holistically about a solution that not only protects your own assets, restores your business operations as quickly as possible, but also incorporates the safety and well-being of employees and the local community.”

There is also the broader challenge of attracting talent into an organisation. “Corporate values and where corporations stand in terms of ESG issues are important to the workforce, and people want see their values reflected and aligned with the organisations where they work,” says Seach.

Risk managers’ holistic approach to risk and insurance management and understanding of which risks impact a business and how the business impacts external aspects such as climate change, the environment and communities positions them extremely well to support with crafting an organization’s sustainability strategy and developing frameworks around ESG risks and opportunities, Seach notes. “We see the interconnective nature of all of these risks and how the risk manager is really sitting at the centre with a broad lens across all of these aspects”.

And it is not just about mitigation and prevention of such risks, she adds, but also about identifying and enabling opportunities. “A focus on establishing resilience before an event happens will, by its very nature, show you where opportunities lie.”

Originally published on Commercial Risk ESG Risk Review on May 17th, 2023