What is ESG?
ESG stands for Environmental, Social and Governance. Together these represent the factors that describe an entity’s behaviour towards the environment, and the communities and stakeholders it interacts with.
ESG is a concept that originated in the financial sector to encapsulate the non-financial factors that socially-conscious investors use to differentiate between different investments. It is now widely used across all sectors, including the public sector.
Environmental factors consider safeguarding the environment, including policies addressing climate change, protecting nature, and managing waste and pollution.
Social factors consider the interaction with and impact on employees, suppliers, customers and communities, including labour standards, diversity and inclusion, and health & safety issues. It also includes social value.
Governance factors consider internal controls and behaviours, including cyber protections and conduct.
Why should ALARM members be interested in ESG?
While ESG is a relatively recent term, the elements it represents are not. For example, health & safety risks are a key part of the ‘S’ of ESG and have always been within the remit of a risk manager. The difference is that now, rather than being considered in isolation, the elements of ESG are considered holistically, which means that those managing risk can have a direct influence on the overall ESG position of an organisation.
Why might an external stakeholder question an organisation’s ESG credentials?
Awareness of ESG is growing among the public and they are making their views heard. Government, regulators and partners are increasingly looking for ESG policies and practises. It is also becoming a factor in attracting employees and creating sustainable workforces.
ESG criteria could be applied in funding decisions, to investments, in procurement and in the supply chain. Financial institutions lending to councils may in some cases require ESG compliance in their terms.
ESG reporting may become an integral part of an organisation’s audit process and its annual report. As such it may fall under the remit of assurance, audit and risk management teams.
Are underwriters considering ESG in underwriting?
Currently, other than in specific circumstances, such as directors’ and officers’ insurance, ESG is not typically considered in underwriting decisions today by public sector insurers. However, in our survey last year 100% of the London insurers surveyed anticipate that ESG will become a feature of underwriting or risk acceptance in the future. That said, public sector underwriting remains driven by claims history and risk exposure. This may change as understanding grows about the links between an entity’s risk and ESG position.
Is ESG here to stay?
Yes. Again, the elements that underpin ESG are not new. ‘Social value’ is a measure that councils have been working to maximise for many years and forms a key part of ESG. Expectations are growing for all entities to be able to articulate their ESG position. If you’re not able to articulate yours, your stakeholders may form their own assessment. All entities should take the opportunity to own theirs.
