- Companies can potentially face reputational damage or legal liabilities if they fail to appropriately manage environmental, social and governance (ESG) issues.
- Allianz Global Corporate & Specialty’s ESG team identified key trends to watch: climate change, water management, preserving biodiversity degradation and saving resources, prevention of exploitation in supply chains and good corporate governance policies.
- Effective management of sustainability issues is increasingly seen as a competitive advantage.
For companies today, it is no longer enough to focus only on delivering profits and creating value for shareholders, they also need to show that they are making a difference to the environment and society. As demand for business to demonstrate its sustainability credentials grows, companies are being held accountable by consumers, investors, regulators and other stakeholders and increasingly face reputational damage or legal liabilities if they fail to appropriately manage ESG issues. Allianz Global Corporate & Specialty (AGCS), the corporate insurance carrier of Allianz SE, hosts Allianz Group’s ESG Business Services team and has identified five key trends that will impact businesses’ ESG footprint in 2020 and beyond: climate change, water management, biodiversity degradation, exploitation in the supply chain and increasing scrutiny on corporate governance.
1: Address climate change in business strategy
Combatting climate change is the key challenge of the coming decade. It ranks 7th in the Allianz Risk Barometer 2020 – its highest-ever position – and is already affecting businesses in many ways, such as an increase in physical losses from more severe weather events or potential market and regulatory impacts such as carbon-emissions offsetting. There are also litigation risks as climate change cases targeting ‘carbon majors’ have already been brought in 30 countries around the world, with most cases filed in the US.
“Companies are realizing that they may face consumer criticism, reputational damage and increasing regulatory and legal action if they don’t adequately address climate change in their business strategy, operations and product offerings,” says Chris Bonnet, Head of ESG Business Services at AGCS. Many companies are now taking action by committing to become carbon-neutral and joining international de-carbonization initiatives. Allianz estimates that responding to the challenges posed by climate change could cost companies worldwide as much $2.5trn over the next 10 years. However, it can also provide new business opportunities, such as renewable energy production methods, CO2 capture, storage and removal or battery production.
2: Ensure access to fresh water for communities
By 2050, the world’s population is expected to reach 9.7 billion – while global water demand is expected to increase by 20% to 30%, mainly due to demand in the industrial and domestic sectors. Currently over two billion people are living in areas of high water stress and almost half of the global population – about four billion people – experience severe water scarcity during at least one month of the year. “Water is a big issue for citizens and companies, alike,” says Bonnet. “Not just concerns about its abundance, but also its purity, its scarcity in a warming climate and its over-use and poor management.”
Agribusiness and farmers, thermal power plants, textiles and garment manufacturers, meat processers, beverage manufacturers, mining and automotive manufacturers are some of the most water-intensive sectors demanding abundant, safe water but how companies treat such resources is coming under increasing scrutiny. Today, more than ever, companies are expected to protect water resources, prevent pollution and reduce their consumption through modern water management practices. Rethinking existing water supply models can benefit local communities and release water stress in certain areas. Growing population and climate change leading to an increase in severe weather events only add to the drought dynamic. Thus, governments, society and corporates should cooperate to address this challenge. “Companies have unique capabilities and perspectives, and can play an important role in analyzing and practically addressing water issues. Businesses also need to evaluate their own dependency on local water supplies and potential water shortages as part of their business continuity planning,” says Bonnet.
3: Protect biodiversity and finite resources
Oceans full of plastic waste, species extinction and severe land degradation due to storm, drought or increasing industrialization, as demonstrated in the felling of the Amazon rainforest, are just some of the most obvious examples of the deterioration of the planet. Sustainable consumption practices can slow future biodiversity loss.
In response a growing number of companies are adopting so-called “circular economy” strategies with the aim of no longer allowing products to become waste after their use. Instead, they are reintroduced into the production cycle as secondary raw materials. Products made of secondary materials range from leftover food to building materials from scrap tires. Many consumer goods companies launch take-back and recycle programs or reprocess used materials for usage beyond their own products.
“Companies which are leveraging the sustainable aspect of existing products or committing research and development resources to recycling programs or eliminating waste will benefit both in terms of resources and reputation,” says Bonnet.
4: Prevent human right violations in supply chains
Human exploitation can take on many forms in the business environment – forced labor, child labor or insufficient labor standards – and it can be difficult to detect in today’s global supply chains. It is estimated that around 40 million people are trapped in modern slavery globally. Industries such as textiles, food and agriculture, electronics, sports, construction, or hospitality have been connected to modern slavery, although all sectors are vulnerable.
More enforcement in the area of human rights and holding directors responsible for transparency in supply chains is gaining traction. Corporations that fail to take appropriate steps to eliminate human exploitation from their supply chains could face shareholder derivative suits, more directors and officers (D&O) claims and reputational risks.
“Businesses need to consider that they are responsible for assessing and policing their supply chains,” says Bonnet. Companies should hold vendors and suppliers contractually accountable to fair wages and working hours and humane treatment before doing business. By implementing the right checks and balances to address violations, companies can be compliant and forthright to customers, vendors, suppliers and investors.
5: Governance issues continue to demand business diligence
Businesses and their directors are under increasing pressure to maintain sound corporate governance, as more investors, in evaluating a company, hold it up to ESG standards. Acts of corporate misconduct such as bribery or corruption, inadequate handling of data privacy, financial misconduct and money-laundering have all made headlines in recent years.
“Firms do not want to fail on governance – it’s literally their bottom line.The prospects of a company are greatly enhanced if it treats its employees right, operates ethically, is fully compliant, avoids reputational risks and earns most of its revenues from sustainable activities,” says Bonnet.
Having inclusive institutional structures in place for multi-stakeholder dialogue and cooperation is essential to ensuring good governance and compliance practices. Good governance relates to systems that enable and ensure accountability, transparency, legitimacy, public participation, justice and efficiency.