ESG has become a top business priority in recent years, but fully understanding it in today’s volatile world is a complicated task. The second season of the “On Aon Insights” podcast series explores the world of climate and ESG (Environmental, Social and Governance) issues. In this episode, host and Aon’s chief marketing officer, Reinsurance Solutions, Alexandra Lewis, is joined by Aon’s head of ESG and Human Sustainability, Laura Wanlass, for a discussion on how to better understand the role of ESG in company decision-making.
Additional Resources:
Episode 49: On Aon's ESG Impact with Leslie Follmer
ESG Data: How Businesses Can Use Data to Gain an Edge
Tweetables:
Alexandra Lewis:
Welcome to the On Aon Insights podcast, where we explore the hot topics surrounding the issues that matter to you. Today, our world is more volatile than ever. We’re overloaded by data and compounded by complexity and uncertainty. Important decisions are often being made without the right information, the right insight and, more importantly, the right advice. This is where we come in. From traditional areas like risk and health to new challenges like technological and digital disruption, we’ll bring together Aon thought leaders and industry subject matter experts to give you the clarity and confidence to make better decisions. This season, we’re exploring ESG – the world of Environmental, Social and Governance issues. Look at any top company website or the business news, and you’ll see that ESG’s a hot topic. But what does ESG really mean in today’s volatile world? We asked Laura Wanlass, Aon’s head of ESG and human sustainability, how to better understand ESG.
Laura Wanlass:
I would first start with, it doesn't matter how I define it. The problem is that there are so many different definitions. Often times we'll help a company to say, “What are employee expectations on ESG? What are your customer expectations on ESG? What are your top investors if you're public, expect from you on ESG?” And further complicating the matter of there being so many different perspectives on what this term means, you also have regulators who have a stance too in terms of how they define it and what should be reported on. And then you have things like changing macroeconomic conditions, globally, also factoring in too. So oftentimes instead of saying, "What is environmental and social governance and what does it mean to the company?" It's more like, “What's material to your company and to your stakeholders?”
Alexandra Lewis:
While there is no one-size-fits-all definition for ESG, or one standard approach, there are three built-in elements to consider. The E and the S, which covers Environmental and Social issues, may vary for companies depending on their region, industries, markets, and culture. But the G, which stands for Governance, will be pretty much the same for companies around the world. Laura talks more about what’s involved with each element.
Laura Wanlass:
How you look at E and S factors is incredibly different if you're a mining company versus a professional services company. That's where you have to really sit back and look at who you are as a company, what industries or markets do you operate within to set your strategy and to know what you want to do on the risk side and the opportunity side of ESG. On the governance side, I would say, especially if you're public, there's some pretty universal things that are expected in terms of board governance. It tends to be the thing that's been required in terms of disclosure for years. Board makeup, candidates, tenure, skills, all of that has been something that, in the United States, for instance, the SEC has required for years.
Alexandra Lewis:
ESG has become a top business priority in the last few years. During the pandemic, and the recent political and civil volatility, ESG has become even more of a topic for discussion. But in recent months, some leaders, companies, and politicians have pushed back against the importance of ESG. Some have called for companies to set aside their efforts in ESG and DEI — that’s diversity, equity and inclusion — in favor of other priorities. We asked Laura about this trend.
Laura Wanlass:
This was semi-predictable. When the money was flowing in and the markets were doing well, investors were very focused on, "You need to start pursuing, improving your ESG profiles." Markets have dipped, so now you're seeing some activism where some top-rated ESG firms, they've failed to meet their financial goals, so investors are like, "Hey, are you focused on the right things? Did you spend, how much money on this? Should you have been focusing on the fundamentals?" Again, putting companies in a weird spot, but you could see how that could happen when the markets get volatile. Does it mean that ESG has gone away? No. You're still going to get asked if you're focused on material ESG factors or not, but you've seen a shift in the way they talk about it. Are you focusing on the things that have financial performance or not? That's the only defense you have if, you are focused on ESG, to avoid some of the criticism from, say, some of the political angles that are coming at you.
Alexandra Lewis:
Perhaps the most important thing to consider in this volatile ESG landscape? Consistency. Setting ESG goals, and sticking with them, will look better for governance. But also, it will earn the respect of stakeholders and consumers. Laura explains.
Laura Wanlass:
Consistency should be a goal. It looks horrible if you are ping-ponging around. But I think that's why the walk before you run thing is really important, just really thinking through and materiality assessment is a good idea. And just stepping back to say, "Which areas should we focus on relative to stakeholder expectations?" Again, you just got to be able to explain what you're doing, and that comes down to good governance, structure and decision-making. And if you do that, you don't have to ping-pong. You might nuance or change the goals over time, and that's okay, but you shouldn't switch things widely from year to year.
Alexandra Lewis:
Let’s recap on what we’ve just learned. Definitions for ESG will vary for individual companies. The elements of environment and social issues may be different for companies, but governance will be more standard. While some are pushing back against ESG, this may change over time. Consistency is key to ESG strategy. And one final thought. While ESG may be a higher-level discussion for leaders and politicians, it has become very important to a demographic that may matter more: employees. Laura explains.
Laura Wanlass:
Employees really care, and that's not going to go away. There is an increasing demographic that doesn't read your financial reports, so they're not looking at your proxy statement or your 10K. They're looking at your corporate website, or they're looking for info sheets, and how you speak to purpose, how you speak to what you're doing is going to be really important going forward, maybe not to all employees, but to a fair amount. And then depending on what industry you're in, customers care too. You do have to balance those financial stakeholders with some of these other constituents as well.
Alexandra Lewis:
Thanks for joining us at On Aon Insights. And thanks to Aon’s Laura Wanlass for her expert take on the topic. We’ll be back in two weeks with another episode exploring ESG and Climate. Remember to check our show notes for recommended reading and places to learn more. And don’t forget to rate, review and subscribe to the podcast. Until next time.