Examining the evolution of ESG

The rise of environmental, social and governance (ESG) factors as a means of gauging investment value lies in a fundamental mind shift that has taken place in a society that is driving for a more sustainable future.

While ESG is more commonly utilised in the investment world, it also carries the sentiment of employees, customers and stakeholders who are increasingly holding organisations accountable for their decisions relating to ESG issues in every aspect of their operations.

The origins of the drive to ESG investing and reporting has its roots in the lessons learnt from various major corporate failures. Some examples include:

Environmental

• 2010: The Deepwater Horizon oil spill took place in the Gulf of Mexico when an oil rig, which was contracted by the oil and gas company BP to drill in the deep waters of the Gulf of Mexico, blew up, spewing more than 206 million gallons of oil into the Gulf of Mexico for 87 days – one of the worst environmental disasters in world history.

Social

• 2012: 16 August 2012, the South African Police Service opened fire on a crowd of striking mineworkers at Marikana, in the North West Province. The police killed 34 mineworkers and left 78 seriously injured. Following the open-fire assault, 250 of the miners were arrested.

Governance

• 2017: Steinhoff International offers an extreme case of financial statement fraud that resulted from inter-company loans that misrepresented the profits they made. Steinhoff owned numerous retail brands and it moved money through inter-company loans to inflate its numbers.
• 2014: The collapse of African Bank Investment Limited was largely caused by a board of directors who had no control over its CEO, with the business not making sufficient provision for bad debts and engaging in unsustainable lending.

“Every key trend has a starting point,” says Angela Jack, head of Specialty Solutions at Aon South Africa. “While these are just a few examples of environmental, social and governance events that shook the world, there are many more that have helped society go back, review and understand what caused these events, and the lessons to be taken from an investment and risk management perspective, so that we can make better decisions around ESG matters.”

A good example is the mining industry, where ESG factors often converge across a market that has a massive environmental impact, but has also shifted focus to more sustainable approaches that include the societal and governance impacts of mining.

“The negative impact that mining has on the environment is a known fact and, as a result, the industry has shifted to expect long-term environmental rehabilitation efforts to be included in the business strategy of any mining company operational within South Africa, to the point where it is legislated. Social aspects related to the mining sector often extend beyond negative connotations, involving a commitment to building communities and providing essential services such as education and healthcare. Programmes tackling issues like domestic violence in rural mining areas work toward uplifting local communities and building something that will be standing long after mining operations have gone,” explains Jack.

Why ESG matters in the insurance industry

The importance of ESG is not lost on the insurance industry. Many of the issues raised affect organisations’ risks from an environmental, social and governance standpoint, driving sustainable and responsible business practices. ESG serves as a good barometer for the insurance industry to assess the risk profile and risk maturity of a business, with insurers looking at factors such as:

• The organisation’s risk assessment
• Long-term viability
• Reputation and brand image
• Regulatory pressures
• Investor and stakeholder expectations

“ESG factors offer valuable insights into a company’s risk profile. Companies that adopt robust ESG practices often manage risks more effectively, making them more insurable from a risk exposure perspective. It is also the key reason investors and stakeholders are placing greater importance on ESG matters when assessing a company’s performance,” Jack explains.

As awareness of global challenges such as climate change, social inequality and corporate governance failures grows, the importance of ESG factors continues to rise. With regulatory bodies and governments worldwide becoming more focused on ESG issues, organisations may be required to meet certain ESG reporting standards. Likewise, insurers may need to align with these regulations and are likely to incentivise the adoption of better ESG practices within organisations.

“ESG’s success hinges upon avoiding token gestures or greenwashing efforts. Instead, it necessitates authentic engagement across all sectors. Reflecting upon how ESG has evolved over the years showcases the integrated nature of ESG that cannot be considered in isolation. And as these factors grow in importance in the insurance industry’s consideration of what constitutes an insurable risk, organisations will need the aid and guidance of an experienced broker and risk adviser to help them adapt to this new reality,” Jack concludes.