Reputation Analytics as a Leading Indicator of ESG Risk

The potential reputation impact of environmental, social and governance (ESG) crises has never been higher, further amplified by interconnectivity, social media, and a 24/7 news cycle. In fact, reputation risk is now among the top five exposures for executives.

Termed Grey Swan events, reputation risk events tend to fall into one of seven categories, including lapses in business practices, product failures, cyber attacks, financial irregularities, and accidents such as fires, spills, and air/maritime crashes.

Yet, many businesses struggle to integrate traditionally non-financial ESG risks into traditional enterprise risk management frameworks, and as a result often inadequately manage them, despite the significant value typically tied up in reputation.

“When a reputation crisis occurs, the consequences can spiral,” says Richard Waterer, Global Risk Consulting leader for Aon’s Commercial Risk Solutions. “Trust is lost, and shareholder value is greatly impacted, impacting a company’s reputation and its ability to return to business as usual.”

The Relationship Between ESG Risks, Reputation and Shareholder Value

Grey Swan events can have a dramatic impact on a company’s reputation and shareholder value. This is not only the case when your company is at the center of the crisis, but also when an entire sector is exposed to similar ESG risks as a company in crisis.

Among the corporate reputation crises spanning the last four decades, reputation crises destroyed more than 50% of value in in over 12 percent of cases, as well as $1.2 trillion in shareholder value across the entire 40-year period. The numbers present a compelling case for taking reputation risks seriously.

The evidence shows that shareholders can lose an average of 26 percent of value at some point during the year after a major reputation crisis. However, the magnitude of the impact on share price is not uniform but related to the market’s perception of the degree of ESG risk exposure and how well a company manages and communicates its efforts to mitigate risks.

“How leaders respond to a brand and reputational risk event can be a key indicator of the overall strength of their leadership and their underlying business – which can also act as a real-time ESG monitor,” says Jason Disborough, Aon’s CEO of Multinational Clients (International).

Anticipating Reputation Crises through Data and Analytics

Reputation analytics help companies anticipate the short-term ESG-related risks impacting their sector and the broader market. Other ESG risk monitors tend to be backward looking and long-term in view. For example, in the ESG materiality assessments many companies focus their ESG strategy on taking a fixed view of ESG risk exposures, and ESG ratings and disclosure data are backwards looking.

In contrast, reputation analytics are driven by real-time headlines, employee sentiment, and current activism which may be more predictive of near-term ESG risks and serve as an important supplement to long-term ESG risk metrics. Often, headline ESG risks like workplace violence, greenwashing and human rights violations are not being captured sufficiently in corporate ESG strategies. Reputation risk monitors are most effective at surfacing these risks for companies to nimbly integrate into their risk management framework and ESG strategies.

Prior to a reputation event, Aon’s Digital Business Insights (DBI) can help organizations to get a clear and in-depth understanding of reputational risks and their impact by:

• Identifying emerging trends for your firm, your industry and your company’s position relative to industry competitors, at both an organizational and employee level.
• Gaining insight into Say on Pay support and ESG proposal trends across key international stock indices and by industry.
• Understanding potential areas of activism exposure, and how your company performs relative to the average on a multi-year basis.
• Understanding key engagement priorities and expectations from top institutional investors and insurance companies.
• Identifying performance targets and best practices to inform your company’s response to them.

“Combining ESG data and tools in ratings, sentiment monitoring and disclosure with market-leading shareholder value impact as a result of a reputation event enables risk managers to not only better understand the past but to better prepare for the future,” says Laura Wanlass, Aon’s global head of Corporate Governance and ESG Advisory.

Integrating Reputation Risks into an Enterprise Risk Management Strategy

Using the insights gleaned from short-term reputation risk monitors and long-term ESG materiality assessments, companies can integrate nonfinancial risks into their enterprise risk management program. By taking the following steps, your company will be better positioned to manage short and long-term ESG risks and weather reputational crises effectively:

• Stakeholder identification and analysis: The stakeholder landscape is mapped to understand how each risk impacts the organization’s critical stakeholders (e.g., Customers, Suppliers, Employees, Community, Regulators, Investors), and to identify which could result in severe reputational damage.

• Reputation risk inventory: A reputational risk register is developed. It provides a list of causation triggers that could lead to reputational impact.

• Scenario impact analysis: Reputation impacts are classified into a loss category to help quantify and support specific scenarios.

• Reputational quantification: Potential financial exposures are quantified using Aon’s Reputational Risk Costing Framework. These are supported through company bespoke loss categories.

The analysis of the above-mentioned critical insights can help organizations to better forecast upcoming risks, determine an optimal risk management strategy and make better decisions around investments in early intervention.

“Reputation risk is indeed quantifiable. Through reputation risk analytics, the true net impact that a reputation crisis has on shareholder value as well as on competitors becomes clearer,” Disborough explains.

“Companies that are able to leverage such real-time reputation risk data can forecast, navigate, prioritize and address evolving ESG risks and opportunities at all phases of their journey, adjusting their strategies to match,” he adds. “They can manage and treat reputation risk exposures, recover and enhance their share price, protecting their enterprise value in the long run.”

Case study: How two FI competitors handled the LIBOR Crisis

When the LIBOR scandal came to light, two culpable global financial institutions took very different approaches to reputation management – with very different consequences. By acting decisively and realigning its ESG priorities, Financial Institution 1 weathered the scandal and not only recovered shareholder value but drove it beyond pre-crisis levels.

Financial Institution 1 jumped into action, made key decisions quickly, and committed to change.

• Admitted it manipulated the LIBOR and accepted responsibility for its misconduct
• Cooperated during FSA investigation
• Agreed to settle at an early stage
• CEO resigned within days of the settlement
• Implemented compliance measures and internal controls

Impact:

• +8% value impact
  
• $3 billion shareholder value added over the post-event year

Financial Institution 2 was slow to act and demonstrated weak leadership and a lack of transparency.

• Slow response from management
• Failed to identify and manage risk of inappropriate submissions
• Uncovered shortcomings in systems and controls
• Suffered serious reputational damage
• Division Head resigns in recognition of mismanagement and impact

Impact:

• -61% value impact
  
• $13 billion shareholder value lost over the post-event year

Valuing your firm’s reputation can help you protect its market value. Want to make better brand and reputation risk management decisions? Visit https://www.aon.com/solutions/commercial-risk/reputation-risk-analytics.

Talk With Us

If you would like to discuss any aspects of these insights please do not hesitate to get in contact with our team.

Richard Waterer
Global Risk Consulting Leader
[email protected]

Ladd Muzzy
Director – Consulting
[email protected]

Laura Wanlass
Global Head of Corp. Gov & ESG
[email protected]

Jason Disborough
CEO – Multinational Clients (International) and Enterprise Client Leader
[email protected]

Martin McGovern
Director - Actuarial and Data Science
[email protected]