Survey Finds Risk Managers Seeking Greater Role in ESG Initiatives

More than three-quarters of risk managers surveyed believe risk management should take a more active role in their organization's environmental, social, and governance (ESG) initiatives.

The WTW 2022 Environmental, Social and Governance (ESG) Global Risk Managers Survey conducted by Willis Towers Watson (WTW) found 77 percent of respondents calling for risk management to play a more active part in ESG initiatives, with 54 percent of the risk managers surveyed indicating they were heavily involved in their organizations' ESG efforts.

The survey also found that improving the organization's ESG score is a core business focus for 74 percent of those surveyed, with regulation and reputation cited as key drivers of ESG strategy by 75 percent of respondents.

The prominence of regulatory issues and reputation as lead drivers of ESG strategy and actions among most respondents suggests that "the stick rather than the carrot is still uppermost in a lot of organizations' minds," the WTW survey report says.

"Nonetheless, there are significant percentages that recognize long-term profitability and risk, changing customer demands, and investor sentiment as factors that will drive ESG strategy forward," the report says.

Some 67 percent of risk managers responding said their organization had clear and specific ESG goals, though only 17 percent reported that their organization has documented risk management targets with clear milestones related to ESG.

The WTW survey found, however, that 35 percent of North American respondents—a higher percentage than in other regions—indicated they expect to have documented ESG risk management targets and milestones within 2 years.

WTW surveyed risk managers around the world on the impact of ESG factors on corporate risk management. The survey also examined risk managers' engagement in addressing ESG risks and pressures. WTW received responses from 312 companies that together employ more than 2 million people.

"ESG is a term used by investors, clients, regulators, and credit rating agencies to evaluate corporate behavior and to determine potential impact on the current and future financial performance and sustainability of companies," the WTW survey report says. "ESG covers a broad set of principles and topics that have become the subject of increasing market, regulatory, legal, stakeholder, and public scrutiny in recent years."

As that scrutiny on organizations' ESG efforts has increased, those organizations are realizing that there are potential implications across numerous areas, including talent attraction and engagement, reputation, and brand, WTW says.

The WTW report notes that several external ESG performance benchmarks have emerged to meet the demand for information about organizations' ESG efforts, though, as yet, no clear yardstick has emerged. Still, the survey found that achieving a good ESG score has become a goal of many businesses' strategies.

The increasing focus on ESG brings with it new risks, the WTW report says. In considering those risks, however, many organizations tend to focus on reputation.

"We find that when many organizations think of ESG risk, they equate it with reputation risk," the report says. "We think that to effectively manage ESG you need to break it down into manageable risks, measure them, and establish a risk management process around them."

WTW suggests that rather than treating ESG risks as a single risk, organizations should take a ground-up view of what constitutes ESG and identify any risks the organization might face related to external ESG benchmarks or any ESG-specific regulatory risks or reporting requirements.

"We recommend a risk mapping exercise, and then assessing the size and shape of those risks (impact, likelihood, velocity), bringing it into your organization's enterprise risk management framework," the WTW report says.

With respect to the "E" in ESG—environmental—the WTW survey found that organizations' actions and priorities inevitably are connected to broader pressures on businesses to become more sustainable and reduce emissions to minimize global temperature change in keeping with the goals of the 2015 Paris Accord.

"Perhaps unsurprisingly, the survey shows that multi-region/global organizations are typically doing more to assess and reduce their climate impacts," the report says.

Regarding the role of the risk management function, most survey respondents indicated they believe risk management practices in the environmental liability area influence risk managers' ESG standing in the organization, according to WTW.

In terms of the "S"—social—many survey respondents identified key risk management priorities in areas such as data privacy and cyber risk (97 percent), workplace safety (88 percent), product liability (79 percent), and employment practice liability (78 percent).

"A large majority of risk managers surveyed agree that progress in risk management practices in these areas can improve their organization's ESG standing," WTW says.

Considering the "G"—governance—"risk management and governance tend to intersect most frequently in due diligence linked to risk adviser, broker, and [insurer] appointments and reviews," WTW says. "Two-thirds of respondents say they are extensively involved in these areas, compared with the around 40 percent that carry out similar work related to suppliers and investment opportunities."

As with social policy decision-making, risk management's involvement in shaping their organizations' governance policies is "patchy," according to WTW.

Ultimately, a focus on ESG isn't just about doing the right thing, the WTW report says. Increasingly, there are real financial effects on organizations, with research showing that over time ESG-focused companies generally have lower risk and higher earnings growth, as well as higher active returns and dividends than other companies.