What Are ESG Practices and How Will They Protect Our Company from Reputational Damage?
Risk managers want — and must — be taken seriously, granted appropriate resources and influence strategy.
Here’s the thing: This is possible only if risk managers apply their skills to the issues that leadership in management and governance believe are mission-critical.
Today, those issues are pledges to upgrade environmental, social and governance practices (ESG) and — attention, Risk Managers — the greatest risk is that unmet ESG pledges will leave stakeholders disappointed.
When stakeholders are disappointed, that’s a reputational crisis.
The actions of those disappointed stakeholders can cascade to include reduced sales, impaired employee morale, nuclear verdicts and increased cost of capital. All of which can drop stock prices and trigger lawsuits alleging a board’s failure to fulfill its duty of loyalty. In short, many perils, many forms of economic loss, and one overarching name: reputation risk.
Which is why, risk professionals must help their firms risk manage their ESG pledges by upgrading their reputational risk governance, operational oversight and reputation insurance portfolio.
To succeed, they need to view their jobs more expansively.
The Risk Management Role in Reputation
Reputation risk can be identified, managed, mitigated and insured — just like any other class of risk. Doing so requires risk managers to be part of an integrated group that can gather intelligence from across the entire enterprise.
Risk managers must understand all promises made, their stakeholders’ expectations and where gaps exist between those expectations and reality.
Utilizing these “centralized intelligence” tools in connection with ESG commitments and reputation insurances communicates a simple, easy to understand and completely credible story of good corporate governance to stakeholders, shareholders, jurors and justices in Caremark pleadings.
It’s a story marketing and investor relations professionals would love to share.
Where Do ESG and Reputation Rank?
ESG and reputation are inextricably linked. A survey early this year of corporate executives revealed that in high performing companies, the executives believed that, on average, reputation accounted for 76% of their firms’ value.
Investors agree. 100% of institutional investors surveyed last spring disclosed that ESG issues impacted their capital asset allocation decisions. The top two issues? Climate and reputation.
A joint white paper recently released by AIRMIC and RIMS titled, “Closing the Gaps on Reputational Risk Management,” suggests that the insurance industry is aware of the litigation costs of reputation loss: “Reputational loss can be significant and can include … litigation expenses.”
Insurers are clearly aware of the benefits of reputation risk management, and the RIMS/AIRMIC white paper credits them with “establishing a link between the reputational event and financial consequences” — essentially agreeing with a 2005 white paper by ACE (now Chubb), Cisco Systems, Deutsche Bank, IBM and KPMG that defined reputation as the “risk of risks.”
Still, a State of Denial
Oddly, some in our industry might still naively claim that there is no clear definition and are mystified by the intangible nature of reputation. It’s not a mystery, how to accurately measure it or what precise business impacts arise out of reputational risk.
That state of denial is in stark contrast with reports from Reports by Agenda (a Financial Times service), the Economist, and Advisen, all of which have described how parametric strategies by insurers have solved the measurement problems apparently that may still be stumping accountants.
Don’t be misled and drop the ball on reputation risk. Clear parametric definitions for reputation and reputational crises have been in use for years.
The definition of reputation is very clear to board members sued for damaging it, CFOs trying to avert a liquidity crisis because of its loss, risk managers trying to mitigate damage to a range of corporate tangible and intangible assets, marketing executives trying to rebuild it, and insurers willing to help underwrite the risk.
A Mantra for the Wise
Here’s a mantra for earning that coveted seat at the table: Reputation is the value arising from the expected benefits of a product or service, and reputation risk is the peril of the loss of that value in the face of disappointed stakeholders.
Consequently, a broken ESG pledge is reputation risk.
Pledging ESG changes without also upgrading enterprise reputation risk governance and management is courting disaster. The disaster, as RIMS and AIRMIC pointed out, is a cost an insurer will bear.
An alert insurer might be open to giving risk managers a break on premium costs as a reward for a good, credible insurance-backed story of effective reputation risk management. &