ESG and See-Through Economy

In this week’s blog post, we’re sharing insights on our latest interview with Steven Minsky. Steven is the CEO and founder at LogicManager, which is a powerful risk management software. Especially during the pandemic, LogicManager has spent a lot of effort to create a relief package for their customers, to ensure their software and services can be used in innovative ways and create success stories and solutions that are available for everyone on their website. We had our first interview with Steven in January, and it was about Data Privacy and how regulations like GDPR are changing the game for businesses. This time we’ve focused on ESG Strategies and the effects of see-through economy.

ESG Has Become More Important Than Ever

ESG (Environmental Social Governance) has been building up for a decade, and became an important factor for companies to enable a robust strategy on. At the moment, the awareness is at an all time high, and certainly a lot of global issues such as the pandemic, BLM and other social and environmental changes brought it to the levels we’re seeing now.

What’s particular about ESG is that, even though it was something society has always aspired to do better, now it has also become a financial mandate. There’s trillions of dollars of investment that are used for social causes. This is partially due to the see-through economy where everyone can share their stories and potentially become viral simply with a click on their phones. You can use this accessibility for everything, including attracting visitors to your organisation or if you’re not careful, to expose the weaknesses in your organization which might make investors or customers flee away from your organization. Best strategy is to see the ESG changes as an opportunity while being mindful of the risks it might bring alongside the new regulatory requirements.

Implementing ESG in Your Organisation

One of the biggest problems when it comes to implementation of ESG is identifying the actual stakeholders. Many organisations will make the mistake of thinking that ESG is only about the environment and deep dive into one simple aspect. What they need to do is take a step back and say, “What or who are my stakeholders?”, “What industry am I in?”, and “What is my relationship to my stakeholders within my industry?”

For example,if you’re a cancer research facility, you’ve got to be looking at donors as your lifeline. You need to see what your donors value. And this is not even necessarily about cancer but rather about connecting to your donors and the interests of your donors. And only after that you can look into the environmental, social and governance aspects of cancer research and implement necessary steps or measures.

The thought process should be relatively the same regardless of which industry you are in, because at the end of the day, the most important aspect and first step of it is to figure out your true stakeholders and what the need or value is. Keep in mind that stakeholders don’t necessarily have to be your investors, it can very well be your customers or anyone that has the biggest impact on your organisation’s financial growth.

After identifying, ESG is all about execution and value. It is important to take it as an opportunity but be well aware of the threats. For example, hiring a controversial celebrity can lead people to boycott your brand or make them buy more products from you. Even if the strategy, and stakeholders are the same, the way you execute a certain concept and show what you value makes a huge difference. Although a lot of people see ESG as an emotional component, you also need to look at it as a business component where you can use ESG aspects as a fact, justify and quantify in a way to use it for the good of your community and organisation.

Evidence and Disclosure of ESG Is Now Crucial

The solutions or the issues around ESG are quite dependent on the industry itself. However, the process could be made relatively simple and similar if it is based upon a model that can produce reliable results in a predictable period of time. In Steven’s case, they use their risk maturity model, which provides the evidence. This is crucial because the FCC recently passed a new enforcement, where you are required to make a disclosure about ESG because of the investor interest. Because of the financial outcomes this is an important aspect to take into consideration. Making a misstatement in your ESG capabilities, your ESG strengths or weaknesses could be held equivalent to making a financial misstatement of your profits and losses, or the strength of your assets, and at the end might come back as a penalty.

Now that the disclosure statement is at the same level as Sarbanes-Oxley Act, meaning that it doesn’t matter whether the misstatements are fraudulent or negligent, organisations are forced to provide evidence of their ESG capability and statements. And this involves any disclosure whether it is formally or informally as long as it has financial ramification and it is something investors are relying upon, the same penalties apply.

This enforcement has now spread to all of the regulatory agencies that have the add-on, as it was with Sarbanes-Oxley, following trade associations, state organizations, as well as to Europe and Asia, making it a hot issue. Together with the see-through economy where external people can create and spread false statements easily, it is easier for companies to be vulnerable. Especially in industries such as oil or petroleum products, this might end up being a big problem where decision makers and risk experts need to work hard on. Right now, one of the best things these companies can do is to acknowledge environmental risks and also address this vulnerability, as not addressing it itself might even be a penalty.

In that sense, using models or solution packages allows you to make ESG disclosures and collecting evidence supporting your claims creates a safe, effective and efficient process which can greatly help your organization. LogicManager also provides solution packages which can help you tackle this issue.

Predictions and Potential Risks for ESG

To be able to talk about prediction, it’s important to look at the data patterns, just as how it is in the rest of risk management. Risk management is about identifying trends and patterns early, and then imagining the unimaginable and preparing for those desirable and undesirable outcomes. If we can accurately look into and analyse these patterns, we will be able to seize the opportunities, or prevent potential threads just like we have mentioned previously.

For more context, we can look into the recession of 2008. When this recession occurred, there was a massive shift in the risk management world. This is also where Sarbanes-Oxley came out, alongside more risk-based approaches and solutions. The current pandemic is doing the same right now. You can see for the next five years clearly what those risks or opportunities on the grounds are, based upon previous patterns caused after massive shifts. Regulatory actions might lag those risks and opportunities because of the see-through economy. For example, the pandemic has put a serious hole around the world and their trust in institutions. Accordingly, in the next five years across the board, you can expect reputation and trust changes, particularly around enforcement actions from a regulatory perspective, and the necessity to show evidence from your institutions to restore the trust investors’ and customers. With the amount of bankruptcies and economic uncertainty we’ve seen due to the pandemic, it is understandable that the investment community is nervous, and they’re going to want to see evidence. Even if your business is not interested in investors right now, you’ll still need to gather this evidence because alongside them, the regulatory authorities and social and environmental authorities are also going to be asking for this evidence.

In anycase, collecting the evidence and the data will also help you in the future, for internal changes such as a board member or decision maker change or adapting to new technologies, ultimately helping your organisation have an easier time with transition. One good example is Exxon. Exxon had always gotten it’s way and most organizations have gotten their way on their board slate for elections. In this particular case, as an unprecedented evidence of the power of this see-through economy, two board members were outed and replaced by an activist organization that put forth a slate based on ESG. It’s preferred directors were not hired at the end and Exxon found that they had a new boss. This comes back again to the power of ESG and the see-through economy, and where your company might be affected dramatically by the power of external sources. Accordingly, Exxon wasn’t doing enough to change its business model, to be prepared for clean energy and that they weren’t investing enough in diversifying from fossil fuels. As a result, they replaced board members to drive the organization, to invest more in clean energy and to ensure the dividends and performance of the stock into the next five years.

Although this is just one example, it seems to be a trend in various organisations around the world, and we can expect companies to make such changes to appeal further to ESG regulations and see-through economy. If you don’t take the see-through economy seriously, and adopt a risk-based approach with fundamental data collection and analysis to rule out anything from the lack of action or pro-active new technologies, you are going to find a tremendous backlash that has unnecessary market and economic harm.

Takeaway Points

The biggest takeaway from this topic is to recognise the opportunities and potential risks that arise from ESG as it is an important aspect of our current risk management world. It is crucial to recognise your stakeholders, their values and what they are focusing on, especially when it comes to current environmental and social challenges, and adapt accordingly to the changes. Organisations shouldn’t be afraid of current changes, and analyse data patterns where similar global shifts occurred when it comes to risk management. Introducing new things to create more opportunities for your company, to adapt to the new norms will become a great asset in the upcoming years. For example, updating the certifications of risk management professionals and giving the staff proper training to accommodate new designations or the new trends on risk-based approach could already make your company be more prepared for the challenges ahead, and in general give a new insight on understanding of the complex world of risk management.

Closing Words

For now, this sums up the key points of our interview. As the Global Risk Community team, we once again thank Steven Minsky for his insight on ESG and see-through economy. More information about this topic is available in our original interview, which is accessible here.

#risk #ESG #social #environment #economy #governance