How ESG Issues Influence Risk Management

Environmental, social, and governance (ESG) criteria help others evaluate specific companies’ ethical status and investment sustainability. These factors are an increasing interest to business, investors, and other stakeholders — not to mention society, in general. 

Naturally, as people’s priorities change, so do customer demands and expectations. These dynamics have created a more spotlighted corporate social responsibility (CSR) for many companies. This post explores how ESG issues unfold in our culture and how companies can respond to this societal shift appropriately, managing risk along the way.

Understanding ESG Factors

Many individuals interchange the terms ESG and CSR, and they’re not too far off. As mentioned, these terms surround sustainability, another hugely broad concept. Nevertheless, in this sense, sustainability refers to investing responsibly in socially conscious companies while pursuing financial return and environmental good simultaneously. 

Many factors contribute to this overarching concept, although there is no universal or standard definition of ESG or what ESG factors are. The events of 2020 are excellent examples of how much our attitudes, attention, and explanation of ESG issues have changed, not to mention why human capital management is essential. Despite the lack of a consistent standard, here are three primary ESG factors:

• Environmental factors: Includes environmental operations and oversight, such as climate risk mitigation and other sustainability issues.
• Social factors: Includes human rights and labor standards, such as child and forced labor, fair pay and benefits, such as gender pay ratio, responsible sourcing (i.e., supply chain), inclusion and diversity, workplace health and safety, and community investment.
  
• Governance factors: Broadly includes business ethics and transparency, maintaining ethics and anti-corruption safeguards, board structure and governance, including board diversity and independence, risk management, data privacy, sustainability reporting, disclosure, and accounting practices.

How the ESG Landscape Is Changing 

Keep in mind that ESG factors are ever-changing, shifting alongside ethic-related issues. For example, the COVID-19 pandemic and police brutality brought unprecedented attention to social justice issues, including disparities in the following:

• Economic opportunities
• Health care
• Internet
• Schools 
• Food and housing security
• Legal justice

Unfortunately, ESG issues have no reliable, consistent, and comparable analysis, mainly due to the lack of regulation. Even so, shareholders, institutional investors, and asset managers are increasingly integrating ESG into their overall investment strategies, pushing companies to make more public ESG disclosures. 

But there is no single global standard or framework for ESG related disclosures. These are complex issues, and many are industry-specific. And because ESG disclosures are primarily voluntary, much information from companies in the same space isn’t standardized or even reconcilable from each other.

The following are key developments that unfolded in 2021, helping to change the ESG landscape:

• March 2021: The SEC’s Division of Examinations published its annual examination priorities, which focused on ESG and climate-related issues.
• May 2021: President Biden releases an Executive Order for his administration to focus on advancing transparent and comparable disclosure of climate-related financial risk, mainly to address disparate impacts on disadvantaged communities of color, and our commitment to net-zero emissions by 2050.
• August 2021: The SEC approved Nasdaq’s board diversity rules.
• November 2021: The UN global summit to address climate change, COP26, announced the formation of the International Sustainability Standards Board (ISSB).

How ESG Issues Shape Risk Management

We each witness how various ESG issues surface in the modern world. Unsurprisingly, ESG issues have plenty of legal implications, including:

• Corporate disclosure-related litigation
• Fiduciary duty-related litigation
• Company governance-related litigation
• Company operations-related litigation
• Worker’s rights and human rights-related litigation
• Diversification-related litigation
• Government-related litigation
• Project-related litigation

Likewise, there are mounting demands for higher quality and universal disclosure on ESG performance indicators. In 2022, we expect more directives and regulatory actions on this topic, such as the SEC’s climate disclosure proposal. As a result, it’s critical for executives to protect their company from new risks as the world around them changes. 

Understanding the details of what coverage your company needs can be a confusing process. Founder Shield specializes in knowing the risks your industry faces to make sure you have adequate protection. Feel free to reach out to us, and we’ll walk you through the process of finding the right policy for you. 

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