Should Middle-market Companies Consider Investing In An Environmental, Social And Governance (ESG) Strategy?

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Taylor Lister is a Principal and Insurance Broker for Marsh McLennan Agency, a subsidiary of Marsh, in Los Angeles.

Given the growing importance of ESG, the answer is yes. A strategic ESG program provides a wide range of benefits, and today it is viewed as a differentiator in the marketplace.

“Embedding ESG is increasingly a source of competitive advantage to the organizations that do it well,” said Amy Barnes, Head of Climate and Sustainability Strategy for Marsh.

What Exactly is ESG?

ESG is best understood by looking at each component: Environmental covers an organization’s approach to climate change, energy efficiencies, carbon footprints, greenhouse gas emissions, deforestation, biodiversity, operational risks such as water and waste management, and other environmentally sensitive issues. Social reflects how an organization responds to its interaction with people, both internally and externally. It involves labor standards, wages and benefits, diversity, human rights, community relations, privacy and data protection, health and safety, supply chain, and other social justice issues. Governance captures the oversight and management of the Environmental and Social components.

Tangible Benefits

Specifically, a strong ESG program can facilitate customer acquisition and retention, attract talent in a tight labor market and generate goodwill in a community by demonstrating accountability and sound business practices.

If they have a choice, many customers, employees, and suppliers would prefer to do business with a firm that has a clear commitment to sustainability and corporate responsibility. This is especially true for mid-market firms, which often have more personal relationships with their stakeholders.

Separate from these benefits is the downside of not having an ESG program. Without a commitment to ESG, institutional stakeholders, such as lenders, insurers, investors and regulators, will scrutinize firms more closely and may consider this in assessing whether to pursue a partnership.

For example, government entities, investor groups and regulators are now evaluating firms based on their environmental business practices.

Firms with established ESG programs can demonstrate a commitment to their community and the environment. Some lenders and insurers have expressed a favorable impression of a firm’s efforts to understand their risks. Regarding Directors & Officers (D&O) liability insurance, insureds with an ESG program can be rewarded with more advantageous coverage terms.

Rising Expectations

None of this is groundbreaking to most executive leaders. What is new is the rising expectation of firms to have ESG policies in place. As large publicly traded companies adopt broad new policies to promote sustainability, address climate change and support Diversity, Equity & Inclusion (DEI), other companies are following suit.

In fact, the disclosure of ESG policies is now a common requirement of doing business with suppliers or government entities. ESG progress reports and related shareholder resolutions also show up in corporate proxy statements and other public filings.

The national focus on ESG has remained elevated after the Business Roundtable updated its Statement of Purpose of a Corporation in August 2019. Comprised of the largest corporations in America, the Business Roundtable said companies have an obligation to run their business for the benefit of all stakeholders. Many firms responded by expanding their ESG programs.

Implementing ESG

Because ESG programs are strategic, the buy-in of executive management is critical to their success. In fact, investing in such a program may require a culture and strategy shift. So where does a company start in building a program?

ESG implementation begins by identifying, prioritizing, and operationalizing opportunities and risks. Many companies either create their own criteria or work with an organization that has an established ESG framework and risk-rating system.

In our work with middle market organizations, we benchmark clients against international ESG best practices and standards and analyze 18 separate ESG themes.

Organizations are able to track performance and progress against the benchmarks, so they can pursue opportunities as they materialize and course correct when necessary.

Working With Insurers

In working and partnering with insurance companies in particular, it is important to convey your ESG strategy and performance. Organizations who communicate the ESG framework being utilized and provide the details for due diligence by an insurer may benefit from the added transparency.

It’s also important to remember that ESG is not a one-way street. Mid-market firms should understand the ESG practices of their insurers, lenders and investors, as well as suppliers and vendors. Management teams who are well-versed in ESG practice are positioned well to evaluate another organization’s commitment to similar ESG engagements.

Your ESG Risk Rating

One way Marsh McLennan Agency is helping clients is through its ESG Risk Rating tool, available through Marsh’s ESG advisors. The ESG Risk Rating, developed by Marsh, is a complimentary self-assessment that enables you to measure your organization’s environmental, social, and governance performance, improve your ESG risks and gain access to risk and insurance benefits.

“Providing clients with a clear framework from which to better understand their ESG performance, make more informed investment decisions, and potentially negotiate better insurance terms are the goals we are collectively striving to achieve,” Barnes said. Learn more about Marsh’s ESG Risk Rating tool at Marsh.com.

Taylor Lister is a Principal and Insurance Broker for Marsh McLennan Agency, a subsidiary of Marsh, in Los Angeles.