Environmental, social, and governance (ESG) issues have become a more critical and widespread topic of conversation. However, making sense of what is at the heart of the issues can often feel daunting. When ESG is mentioned, we hear climate change, diversity and inclusion, and leadership—but that is just the surface. Making ESG more applicable and relatable is key to making it more impactful.
What is ESG?
ESG is a standard set of benchmarks for most aspects of a business’s operations. In 2005 the Who Cares Wins initiative developed these criteria to be implemented. The objective was for investors to have a set of standards to screen a prospective business partner before becoming involved with an organization. These standards show not just how a company observes ESG but how they perform in these areas.
Environmental standards show how an organization facilitates its relationship with nature.
Social studies the relationships of all aspects of the organization, both internally and externally.
Governance sets guidelines for how a company regulates and maintains leadership personnel, finances, controls, and shareholder rights.
Companies are facing increased scrutiny for the way they approach ESG. We are seeing growing demand amongst key stakeholders for more sustainable business practices. This means investors, insurers, policy makers, consumers, and employees are basing more and more business decisions on ESG criteria. They want to support and invest in companies that prioritize environmental, social, and governance issues.
Environmental risks for middle-market organizations
Environmental issues through the ESG lens capture climate change, energy efficiencies, carbon footprints, greenhouse gas emissions, deforestation, biodiversity, and other environmentally sensitive issues. Certain industries find themselves in the environmental spotlight more than others. Energy and agriculture are two that face additional pressure for their impact on climate change, water pollution, and biodiversity. Perhaps your organization has yet to experience the level of scrutiny of larger organizations or certain industries. Why should your middle-market organization consider their sustainability performance?
There are already over 1,800 climate-related regulations around the world. Though they may not impact your business yet due to your size or industry, these regulations will become more common in the future.
Your organization’s sustainability narrative extends beyond your direct impact on the environment. Consider the businesses within your organization’s supply chain. Do their sustainability standards reflect your own? Does the manufacturing plant you use correctly dispose of their wastewater? Does your transportation company follow EPA guidelines for low emissions? Does the company that provides the resources for your product contribute to biodiversity efforts? A negative impact of a business partner could have a negative reflection on you.
Environmental risks also consider nature’s impact on your business. As climate change worsens, natural disasters become more common. How could a hurricane, wildfire, flood, drought, or other natural disasters directly or indirectly affect your business operations?
How to evaluate your environmental risks
It can be daunting to consider all that goes into your company’s sustainability performance, especially when regulations don’t immediately impact your operations. However, embedding environmental issues into your corporate strategy now can be a competitive advantage in the future. The first step? Define your current ESG score. MMA can help with the Marsh ESG Risk Rating tool. This free self-assessment gives you a lens into your ESG risks and helps you define the milestones on your journey.
We also have knowledgeable personnel on our MMA Environmental team with the experience needed to consult your business on how to improve your ESG rating and how to mitigate and plan for risks associated with environmental occurrences. Contact an MMA professional today to see how we can help you.
To hear more on environmental risk, listen to our most recent episode of Marsh McLennan Agency’s “Confidently Covered” podcast. Host and Private Client Services President Pete Walther interviewed Mike Berners-Lee, author of “There is No Planet B: A Handbook for the Make or Break Years.”
