Is ESG the ‘Nudge’ Enterprise Risk Management Has Been Waiting For?

I was grading some assignments on how ESG (Environmental, Social, & Governance) is having a direct impact on how the insurance industry interacts with the market and manages its internal environment for its stakeholders. Taking a stakeholder capitalism approach, ESG in this context takes into account not only financial stakeholders (e.g., shareholders) but ALL stakeholders (e.g., suppliers, employees) that play critical roles in helping an organization achieve sustainable success. Doing research on ESG you will see that it covers the full spectrum of key areas that enterprise risk management processes seek to venture into in order to create and protect corporate value. A goal I would say is a holistic generalization of what ERM is at its heart, what makes it tick.

ESG VICTORY = SUSTAINABILITY (+) SCALABILITY

If you have studied Enterprise Risk Management for any amount of time, you will know it is not the most popular subject at any social event you attend and is surely not one that Boards and executives circle on an agenda in a day full of business meetings. It is simply not sexy enough, necessary but definitely not sexy. With ESG assessments looking at every facet of how a business or organization interacts with the world around it and treats its own, it encompasses an environment that includes all of the disruptors or challenges that could impede efforts to achieve strategic objectives. Those disruptors of the business’s main objectives I would say are “strategic risks” or one’s management and senior leaders are most concerned with addressing, the big fish if you will.

With ESG becoming such a socially-driven requirement (where ERM never has been) of public and private companies, I believe risk management is finally provided with a vehicle that can help drive those ERM-focused conversations that are now framed in a different light. A changed narrative whereby seeking to improve on the areas within the ESG structure that is unique to any company can become a new avenue for risk leaders to travel down to meet their goals of improving risk intelligence and its impact on strategic decision making across the enterprise.

ESG is constantly looking to find vulnerabilities in how the business interacts with ALL its stakeholders (internal and external) which is a key function of the ERM approach. A dynamic, ever-moving assessment of the business’s existence and trying to figure out where uncertainty, disorder, randomness, or entropy might come from. A truly exciting and daunting task; never a dull moment for management or risk leaders.

I am also interested to see how ESG scores continue to shape investment decisions and decisions by other stakeholders (e.g., insurance carriers) in how they approach establishing business relationships with others. From my extensive studies in the ERM space, I have never seen an “ERM Score” investors or any other parties use to predict the future performance of an organization. I believe this is also another spot that the discipline could leverage, the current and forward momentum of the attention ESG initiatives are getting in today’s market economy. For an exercise do this…Google the abbreviations ESG and ERM and see how many more relevant, recent articles you see for the first option. This will tell you all you need to know on how risk leaders can exploit the ESG movement to achieve their ERM goals if they are finding themselves standing in a stagnant pond rather than a raging river (where they would much rather be). Just some thoughts for the day, until next time…

-CR