A socially responsible post-pandemic world beckons: Are organisations ready?

Environmental, Social and Governance (ESG) risk is gradually moving up the list of organisations’ priorities as the world shifts towards a new era – a post-pandemic world shaped by digitisation, innovation, and social responsibility.

At the recent Aon India Risk Symposium, Meredith Jones, Partner at Aon U.S. and head of Global ESG Think Tank outlined common ESG risk factors and emphasised the benefits of good ESG practices on an organisation’s reputation.

“If a company has a strong reputation, they tend to have 2.5 times better stock performance compared to the overall market.” Jones said. “With more than 900 different ESG factors existing across all industries, it is virtually impossible to ignore the potential impact these factors have on a company’s future financial resolve.”

With ESG playing an increasingly pivotal role in maintaining reputational risk and managing long-term sustainability, how can business leaders prepare for the road ahead? What ESG practices can organisations adopt to create and protect reputational value?

The multitude of ESG factors first requires business leaders to understand the risks relevant to their organisation, and how they will impact the organisation’s financial performance. Jones suggests identifying these risks by looking through the perspectives of an organisation’s external and internal stakeholders. In doing so, more tangible actions can be taken to mitigate these risks that have a ripple effect on the organisation’s stakeholders, its financial sustainability and reputation.

Building strategies that practice environmental sustainability will perhaps soon be the norm. India is case in point.

“More Indian companies have switched to a green portfolio and are implementing sustainable practices to boost their ESG practices,” says Jones. “According to a recent study conducted by the Indian Chambers of Commerce and Industry (ICC), 25% of investments made contribute towards responsible investing techniques in India.”

ESG, socially responsible investing and impact investing are all yielding tangible returns in the country. NIFTY100 ESG outperformed NIFTY50 by providing superior returns in the year 2020 (5-year returns).

This shift to environmentally sustainable business practices is also more cost-effective in the long run, either by using more efficient methods of production or developing carbon credit markets.

“By managing climate change risks, organisations can mitigate these volatile changes and thereby face reduced systemic risks such as the disruption of supply chains, competition for resources, and volatile demand of goods and services,” Jones advises.

Adapting to the changing demographic of the workforce when acquiring human capital is becoming even more important in today’s rapidly changing business environment.

Generation Y – better known as millennials – and Generation Z are entering the workforce with different values from their predecessors. For instance, these young individuals prioritise aligning their values with the company they work for, along with where the company places its investments in. “Failure to adjust to this new demographic not only implicates talent acquisition, but also employee retirement plans,” Jones explains.

Ensuring workplace safety is another key factor in mitigating human capital risk. Workplace safety not only affects employee turnover rate and talent acquisition costs, but also impacts claims.

“Recent cases of insurers being picketed for supporting companies with poor ESG credentials are a testament to the importance of good ESG practices,” says Jones. “Insurers are becoming increasingly aware of ensuring that their clients have effectively managed ESG risk factors so they can reduce the risk of loss and insurance payment.”

Implementing good ESG practices help to not only mitigate non-financial risks but financial ones too.

With more than 650 mandatory and voluntary ESG regulations, it is paramount for business leaders to understand how to navigate the terrain it resides in, in order to gain its social license to operate – the seal of approval from stakeholders who support the organisation’s business model and operations. Conversely, damaging one’s social license to operate results in adverse effects on client acquisition and client retention.

“Achieving and maintaining this social license to operate is therefore crucial, as it forms the bridge between organisational reputation and market value,” Jones suggests.

Also, the impact of an organisation’s reputation is considerable. According to the Reputation Institute (now known as RepTrak), a one-point increase in reputation yields a 2.6% increase in market capitalisation.

Though ESG risk factors are not directly visible on an organisation’s financial balance sheet, it remains a key factor in creating reputational and financial value for the organisation. “With 44% of investors reporting that mitigating ESG risk is a critical factor in their activities, it is time for organisations to step up to the plate and prepare for a post-pandemic era – one where the new normal is better than before,” Jones concludes.

Watch this video to find out more about ESG risk factors, or contact your nearest Aon consultants for assistance.