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.

Allianz Commercial is the center of expertise and global line of Allianz Group for insuring mid-sized businesses, large enterprises and specialist risks. Among our customers are the world’s largest consumer brands, financial institutions and industry players, the global aviation and shipping industry as well as family-owned and medium enterprises which are the backbone of the economy. We also cover unique risks such as offshore wind parks, infrastructure projects or Hollywood film productions. Powered by the employees, financial strength, and network of the world’s #1 insurance brand, we work together to help our customers prepare for what’s ahead: They trust on us for providing a wide range of traditional and alternative risk transfer solutions, outstanding risk consulting and Multinational services as well as seamless claims handling. Allianz Commercial brings together the large corporate insurance business of Allianz Global Corporate & Specialty (AGCS) and the commercial insurance business of national Allianz Property & Casualty entities serving mid-sized companies. We are present in over 200 countries and territories either though our own teams or the Allianz Group network and partners. In 2022, the integrated business of Allianz Commercial generated more than €19 billion gross premium globally.

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

The Allianz Group is one of the world's leading insurers and asset managers with around 125 million* private and corporate customers in nearly 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 737 billion euros** on behalf of its insurance customers. Furthermore, our asset managers PIMCO and Allianz Global Investors manage about 1.7 trillion euros** of third-party assets. Thanks to our systematic integration of ecological and social criteria in our business processes and investment decisions, we are among the leaders in the insurance industry in the Dow Jones Sustainability Index. In 2023, over 157,000 employees achieved total business volume of 161.7 billion euros and an operating profit of 14.7 billion euros for the group.
* Including non-consolidated entities with Allianz customers.
** As of December 31, 2023.

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Heidi Polke
Allianz SE
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