When It Comes to ESG Practices, It’s Imperative To Remember Your ‘Why’
Each year, RIMS, the risk management society, holds its annual comprehensive risk management conference featuring a wealth of knowledge-building and thought leader insight for the risk management community.
This year’s event, RIMS Live 2021, is being held virtually April 19-30. As one of the featured speakers, Brad John, head of life sciences at The Hartford, will be presenting on the importance of how a company approaches an issue from an environmental, social and governance perspective (ESG).
Specifically, John’s talk will focus on a company’s motivation or purpose and the belief system that drives it to produce a product as well as how they do it.
The how and the why are more meaningful from a risk management perspective than the products or services they provide. His session, “ESG: Why How You Do Something Matters More Than What You Do,” will be available on-demand as part of the conference.
“I use life science as the example during my talk. Whether it’s discovering a new vaccine or making a breakthrough in cancer treatments or developing a knee implant — the life science industry delivers tremendous value to our society,” he said.
So what they do is inherently important, but behind that is the how and why they do it. Both the how and why impact a company’s entire operations. It also plays a big role in keeping their employees, customers and the communities they work in safe.
An Evolution of Sorts
The idea behind environmental, social and governance protocols has been around for some time now, but it really started to take off in the mid-2000s.
As John explained, in 2006, the terms “environmental, social and governance” were specifically mentioned in the United Nation’s Principles for Responsible Investment report. Since then, numerous reports have come out showing the positive impact that ESG has on performance.
“ESG offers an interconnected approach to enterprise value creation and those material items, which are becoming increasingly relevant to stakeholders,” John said.
“Companies who focus on customer impact and ESG product and investment integration, for example, are better positioned to provide stakeholders with significant benefit in the long run. Key stakeholders want to work for, buy from and invest in companies that have a purpose aligned with their values, and a business strategy which meets their intentions.”
Today, ESG is an imperative for companies. Investors, employees and consumers demand it. In addition, more and more investment firms have included sustainability as a criteria for investing.”
It’s also proven critical for recruiting and keeping top talent. John pointed to a recent study by LinkedIn that indicated employees want to work for a company that shares similar values as they do and is aligned with a purpose they believe in.
What’s more, consumers prefer products that are socially responsible. NYU Stern Center for Sustainable Business published a study showing that products marketed as sustainable grew at a rate of 5.6 times faster than those not marketed as sustainable, John noted.
“Companies who demonstrate a meaningful purpose – their why – are able to attract employees who want to support it. Employees who work for a company with a purpose they believe in are more engaged and higher performing,” John said.
“This impacts how they do their jobs and leads to better execution of quality controls beyond just the check the box standard operating procedures.”
From a risk standpoint, better ESG programs lead to fewer loss experiences. As an underwriter several years ago, John started to recognize the correlation between strong ESG programs and fewer losses at a company.
“I took a retroactive deep dive on the data and compared performance based on a third party ESG rating method and was able to prove it,” he said. “Strong ESG programs can help mitigate the impacts of a crisis, expedite recovery and minimize loss.”
The better part of John’s career has been focused on the life science industry, which are companies primarily regulated by the FDA and focus on medical products for people or animals. The life science industry is highly regulated, so companies are required to have certain quality controls in place.
“Those quality controls are really just table stakes,” John said. “Great companies go above and beyond because it is the right thing to do and is in keeping with their ESG philosophy.”
For example, a decent medical device company that really has no “why” other than to produce a product will, of course, strive to apply all the codified requirements of the industry into their operations. They have to do this in order to not be shut down.
But a great medical device company with an established purpose, their why, will go beyond the minimal requirements, and create higher standards as well as a culture of safety first.
“Their purpose drives them to make the highest quality products in the safest, most sustainable way possible and strive to do it better than their competition,” John said. “They are not just in the business to produce a widget — they have a purpose that drives what they make and how they make it.”
Avoiding Key Mistakes
Because of the complexity of ESG issues, companies have a tendency to make some key mistakes.
First, John said companies often think that they are on top of the “how” because they have the “check the box” mentality with regards to quality control measures.
What they are missing is that the “how” is not about whether you have a standard operating procedure that addresses something, it is about why that procedure exists and what the underlying intent or company position that drives it really is. “If the company and its employees can’t answer that question, then the fact that the control or procedure exists doesn’t mean much,” John said.
The other area where companies may make a mistake is by only sharing their quarterly earnings report or a high level overview of the company’s products and/or services with their agent or broker and carrier.
The more they encourage their agent or broker to share information with the carrier, and the more a carrier can understand about their business, and their how/why, the better and more targeted the carrier services and dialogue on the account can be.
In a time where companies could be forgiven for focusing on core operations rather than ESG, John said the companies who have doubled down on ESG will produce better results both from a risk and operational perspective.
For many companies this focus also helped them create a new normal moving forward that will likely make them more competitive in their market while minimizing their overall exposure to risk.
“Those that implement ESG the best follow some fairly basic guidelines and engage stakeholders in the development process,” he said.
“And they continually look to build social capital both internally and externally and build resiliency into their culture. There are growing expectations from investors, customers, employees and other stakeholders in regard to ESG disclosures and this will increase over time. Companies will need to report more actively on material items and be prepared to engage in direct conversation that is backed by data and a compelling narrative.” &