ESG Risks to Watch

The global outbreak of coronavirus and the business interruptions that followed show how vulnerable companies are to risks.

Of course, it’s not possible to predict when and where the next pandemic is lurking. But what will hardly come as a surprise are environmental, social and governance (ESG) risks, which have been brewing for some time now and gaining increasing traction.

In its latest Global Risk Dialogue, Allianz Global Corporate & Specialty (AGCS) - the corporate insurer of the Allianz Group - highlights five ESG issues to watch in 2020. 

Climate change

Even as Covid-19 dominates the headlines temporarily, climate change remains on the top of people’s minds. Understandably so: it is the most pressing challenge of the coming decade. The rising cost of global warming is becoming rather obvious – from 1980 to now, weather-related and flood loss events have tripled to quadrupled. 

In fact, extreme weather events are claiming around 16,000 lives in G20 countries annually, according to Climate Transparency. The estimated cost is a steep $142 billion per year. From threat to facilities and corporate assets to supply chain disruptions due to broken energy and transport links, businesses have much to lose as the seas rise, droughts get drier, the ferocity of storms intensifies and the threat of massive flooding rises.

That’s not all. There are environment-related lawsuits lurking.

“Climate change cases targeting ‘carbon majors’ have already been brought in 30 countries around the world, with most cases filed in the U.S.,” says Christopher Bonnet, Head of ESG Business Services at AGCS. “It’s not just governments and regulators who are putting pressure on companies to positively respond to climate change, however. Climate-linked activism against corporates is a developing trend – particularly in Europe – and boards are increasingly challenged by investors and other stakeholders.”

The price of responding to the challenges posed by climate change could be as high as $2.5 trillion over the next decade, according to an Allianz study.

Water management

That plain glass of water in your hand could become quite a precious resource going forward. In the next three decades, the planet is expected to house 9.7 billion people. Consequently, the demand for water is seen rising by 20-30 percent.

Even today, there are populations thirsting away. As many as 2 billion people live in areas of high water stress. About 4 billion people – nearly half of the global population – experience severe water scarcity for at least a month per year.

Throw in the increasing demand plus the consequences of climate change and the writing is on the wall.

Among industries, agribusinesses and farmers, thermal power plants, textile and garment manufacturers, meat processers, beverage makers, miners and automotive manufacturers are among the most water-intensive. Their use of water is now coming under scrutiny.

Companies are under pressure to protect water resources, prevent pollution and optimize their consumption through efficient water management.

allianz AGCS risk dialogue ESG risks for businesses

Biodiversity

Economic growth comes at a cost. Human activity has affected nearly 75 percent of the terrestrial environment and about 66 percent of marine environment. A whopping one million species face extinction.

The degradation of land because of storms or drought has also brought down productivity of nearly a quarter of land worldwide. This could hurt global crop production by a steep $577 billion annually, affecting the livelihoods of up to 300 million people.

That ubiquitous plastic is doing its own harm. Plastic pollution has increased tenfold in the past four decades, with 300-400 million tons of heavy metals, industrial waste and sludge dumped annually into global waters. 

“There’s no question human activity affects the Earth’s health,” says Bonnet. “Businesses must understand profitability will actually be reduced if they continue to exploit natural resources without considering the reputational, fiduciary and regulatory consequences of their actions.”

The ”circular economy” strategy is becoming popular among companies. This strategy aims at turning products into secondary raw materials instead of waste. 

“Companies which are leveraging the sustainable aspect of existing products or committing research and development resources to bring sustainable products to market are more likely to find a competitive advantage and be more efficient in managing other sustainability initiatives,” says Bonnet.

Human exploitation

While the stronger association of ESG is usually with environment, the ‘social’ aspect cannot be ignored. Forced labor and modern slavery are realities for many people. However, even companies with the best intentions could find it hard to detect these social malaises in their supply chains. Particularly at risk are industries such as textiles, food and agriculture, electronics, sports, construction, hospitality and domestic services.

Top managers of companies are urged to be vigilant about human rights violations in their supply chains. The cost of turning a blind eye could be significant – from lawsuits to regulatory action to reputational risks.

“Diligence is key,” says Bonnet. “Companies can instill a supplier code with various degrees of implementation rigor. Risk management can help if businesses supply an audit of a supply system and determine gaps and suggest solutions.”

Corporate governance

In this day and age of social media, corporate governance missteps can harm a company’s reputation in the blink of an eye. “It’s important for company prospects if a company treats its employees right, operates ethically, avoids reputational risks and earns most of its revenues from sustainable activities,” says Bonnet.

From bribery and corruption to data privacy mishandling and frauds, companies have come under fire for a range of issues related to weak governance controls.

If companies do not self-regulate, they might have to face excessive regulation.

“Good governance relates to systems that have qualities of accountability, transparency, legitimacy, public participation, justice and efficiency. Insurance rewards these best practices. Firms do not want to fail on governance – it’s literally their bottom line,” finishes Bonnet.

allianz climate strategy
This article is based on a story published in the AGCS Global Risk Dialogue Spring/Summer edition. Click here for a more in-depth look into these ESG risks.

About Allianz Global Corporate & Specialty

Allianz Global Corporate & Specialty (AGCS) is a leading global corporate insurance carrier and a key business unit of Allianz Group. We provide risk consultancy, Property-Casualty insurance solutions and alternative risk transfer for a wide spectrum of commercial, corporate and specialty risks across 10 dedicated lines of business.

Our customers are as diverse as business can be, ranging from Fortune Global 500 companies to small businesses, and private individuals. Among them are not only the world’s largest consumer brands, tech companies and the global aviation and shipping industry, but also wineries, satellite operators or Hollywood film productions. They all look to AGCS for smart answers to their largest and most complex risks in a dynamic, multinational business environment and trust us to deliver an outstanding claims experience.

Worldwide, AGCS operates with its own teams in 33 countries and through the Allianz Group network and partners in over 200 countries and territories, employing over 4,300 people. As one of the largest Property-Casualty units of Allianz Group, we are backed by strong and stable financial ratings. In 2019, AGCS generated a total of 9.1 billion euros gross premium globally.

The Allianz Group is one of the world's leading insurers and asset managers with more than 100 million retail and corporate customers in more than 70 countries. Allianz customers benefit from a broad range of personal and corporate insurance services, ranging from property, life and health insurance to assistance services to credit insurance and global business insurance. Allianz is one of the world’s largest investors, managing around 740 billion euros on behalf of its insurance customers. Furthermore, our asset managers PIMCO and Allianz Global Investors manage almost 1.6 trillion euros of third-party assets. Thanks to our systematic integration of ecological and social criteria in our business processes and investment decisions, we hold the leading position for insurers in the Dow Jones Sustainability Index. In 2019, over 147,000 employees achieved total revenues of 142 billion euros and an operating profit of 11.9 billion euros for the group.

These assessments are, as always, subject to the disclaimer provided below.

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Heidi Polke
Allianz Global Corporate & Specialty (Munich)
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