Environmental, Social & Governance (ESG): Why is it Important to My Business?
ESG (Environmental, Social & Governance) is a term that is used in many different arenas with increasing frequency. There are as many definitions and applications as there are players in the ESG movement.
So, what does ESG mean? Though ESG can mean something different to every organization, one thing is certain: The growing relevance in the corporate, legal, regulatory, investment and political environments make it a trend that cannot be ignored.
Looking at ESG as a strategic framework used to identify, implement and measure corporate objectives and activities helps illustrate why the concept is gaining increased relevance.
Environmental: How behavior impacts the environment
-Examples: Climate Change, Pollution, Waste
Social: Relationship with the people and institutions in the communities where business is done
-Examples: Equality and Diversity, Product Safety, Human Rights
Governance: Internal system used to govern, make decisions and comply with laws and regulations while meeting the needs of external stakeholders
-Examples: Values, Practices, Compensation, Diversity
In short, stakeholders’ value of a business extends beyond the bottom line.
While advocates for social responsibility in conducting business have been around for hundreds of years, the recent upward trend in ESG awareness is being driven by a host of factors that show no signs of abating. As such, corporate scrutiny by regulators, shareholders, financial markets and the legal arena continues to increase.
- The SEC proposed rules mandating ESG disclosures.
- Shareholder activist campaigns with environmental and social objectives doubled in the past five years, according to a recent RBC Capital Markets study.
- The world’s largest asset manager, Blackrock, incorporated ESG performance as a key driver in selecting investments.
- There has been a 51 percent increase in climate-related litigation in the past five years, when compared to the previous five years, according to a database by Columbia Law School and Arnold & Porter.
The enhanced focus on ESG is resulting in positive impacts, including the potential to save money.
For example, governments and suppliers are using ESG performance as a screening tool in awarding contracts, licenses and access to new markets.
ESG scores derived by an independent, third party are factored into selecting and valuing acquisition targets and supply chain partners.
Strategies that reduce energy and raw material consumption result in short-term savings and long-term protection against rising costs. FedEx’s adoption of electric/hybrid engines in 20 percent of their 35,000-vehicle fleet resulted in a 50-million-gallon reduction in fuel consumption. According to an article in the November 2019 McKinsey Quarterly.
However, ESG goes beyond hybrid vehicles. Engagement can run the gamut from hiring a consultant to developing a comprehensive strategic plan and data measurement system, to engaging a law firm to focus on regulatory requirements or forming an internal team to provide recommendations on ESG priorities.
Regardless of the approach taken, it is never too early for a thorough review of key insurance policies to ensure coverage is mitigating these evolving exposures. Oswald Companies can guide you through this process to ensure you are meeting the needs and demands of your stakeholders.
For more information, visit our Property & Casualty page or contact:
Senior Placement Specialist
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