Mitigating future risk: anticipating reputational exposures in an ESG-conscious world
This article contains statements, paraphrases and conclusions from Kennedys Fostering Innovation Panel, The rise and rise of intangible risk: ESG and reputation. The panel considered how the integration of ESG within the business environment will continue to impact the exposure of insurers and insureds to reputational risk.
Reputational risk is an inevitable consequence of living in an interconnected society. It is also a commercial fact that reputation is critical to the viability of a company. Due to its interconnectivity, reputational risk is a highly correlated exposure: often referred to as the “risk of risks,” as reputation can cut across a full range of commercial areas.
The first incident, be that a cyber breach, director misconduct or greenwashing, has the potential to trigger another event in the form of reputational damage. Events in the past decades have thrown the value of reputation into stark relief: take the $59 billion in firm value lost by BP shareholders from the reputational effects of the 2010 Deepwater Horizon oil spill, a loss from which the company has still not recovered.
As our panellist, Dr Keith Smith of Risk Covered, noted, when it comes to reputation, “capacity” to absorb reputational threat and damage is key. Those companies that have built up trust and understanding with the public will be better able to manage and mitigate reputational damage when misfortune strikes.
However, public patience is finite. Once a reputation is lost, in the words of Othello, “all that remains is bestial”: public trust is incredibly hard to win back. We need only look at the continued erosion of public trust in the Metropolitan Police and its ability to police by consent to see the issues when the public capacity to absorb crises in an organisation is spent.
An ESG-conscious world
While reputational risk is not new, the level of risk and the sources of exposure have evolved. One of the biggest changes to our business landscape in the last decade has been the growing dominance of the ESG agenda. This has led to consumers increasingly assessing the brands they choose to buy from and invest in, based on a company’s environmental pledges and wider societal commitments. Collectively movements have been created where people will hold companies to account if there are discrepancies – perceived or otherwise – between pledges and action.
No sector is immune: Denise Eastlake, Legal Director at Kennedys, referred the panel to recent statistics that show half of all cases brought against companies for climate related activities were against non-fossil fuel companies.
As our society becomes more ESG-conscious and the reporting and regulatory requirements to comply come into sharper focus, companies will come under ever greater scrutiny from stakeholders to match their actions to their commitments. Those who do not, could face considerable damage and even litigation.
This picture is compounded by social media having become the channel of choice for voicing frustrations with products or services. Together with the modern news cycle, it is becoming easier for clients, investors or communities to organise and cause reputational damage. That includes activist investing, organising online campaigns and boycotts or simply releasing videos on social media showing potential failings or malpractice.
Technology and the role of insurance
While certain technology has therefore compounded reputational risk, other types have provided tools and approaches that allow organisations to better mitigate the risk. The legal and insurance sectors must be ready to adapt and be an enabler of technology playing its part in improving the risk management process.
As panellist Joe Cunningham, Product Manager, Kennedys IQ, told the audience, data will be crucial to this process. This is, critically, not about simply collating vast amounts of data, but having the tools for its interpretation. Telling the right story can enable a company to use the data it gathers to its benefit: not only manage existing exposures but to mitigate against future risk.
In addition, with the growing availability of large datasets, as well as technologies such as AI which can analyse them in real time, we can finally start to quantify the capacity of a company’s reputation to endure a crisis.
Kennedys has therefore taken the vital step to lead a consortium to identify and assess reputational risk. The project - “Reputation Adviser” - is about to celebrate its first birthday and is building a cutting-edge platform to quantify reputational risk in real time.
This is not to say technology will completely replace the need for humans in risk management. As Mark Twigg, CEO at H/Advisors Cicero warned, while these tools can warn us of the icebergs ahead; we still need to step in and change the course. Part of that response requires looking at how an organisation is structured, so that something as important as ESG does not sit with the CEO alone. Sponsorship is required by the entire board and wider business.
There is also a vital role here for insurers, who can lean in and take on a consultative role with their clients. Risk carriers have access to technology and data many of their cover-holders do not; they may need to take on a more active role and advise corporates to help improve decision making and risk mitigation.
Finally, mitigating reputational risk is far from easy. As a start, any client or insurer, to be taken seriously in their ESG undertakings, needs to match the actions of their organisation to their declared values. Technology has given the public new tools to check the authenticity of corporate commitments and raise the alarm if they are skin-deep.
The age of impunity is over. There are more reputational icebergs ahead. But we now also have tools to see them well in advance and those who adopt them will emerge stronger and more resilient.