Do You Know the Role Non-Regulators Play in Driving Your Business Decisions?

In the absence of a unified regulatory or reporting scheme in the US, non-regulators are performing a substantial amount of the work that is being done in the ESG arena. These include customers, investors, lenders, proxy advisors, ESG raters, credit rating agencies, and insurance companies. Let’s take a look at a few.

Customers

Many large customers have extensive ESG-related reporting, audit and compliance requirements. These requirements are part of the supply contract, and bind a buyer to the same extent as other contract terms. Some of those requirements come from standards, such as ISO standards, or codes of conduct, like the Responsible Business Alliance, or RBA code of conduct. Other customers have their own, proprietary standards and requirements. Depending on your mix of suppliers, you may have to agree to and comply with multiple, differing standards.

The Debt and Equity Constellation

Investors, lenders, credit rating agencies and proxy advisors use proprietary systems for evaluating a company’s effectiveness against a set of ESG metrics. The results of the evaluations are used to make ratings, lending, and investment decisions.

Investors may divest themselves of the stock of a company that falls outside the bounds of the investor’s ESG-related parameters. If you want to retain an investor that has a policy of not remaining invested in companies whose directors have a long tenure, for example, then you will examine your policy on director tenure. It is not a contractual requirement, but a practical one.

Activist investors typically acquire a stake in a company in order to influence its strategy or practices. An activist investor that threatens shareholder action in opposition to a particular practice, such as human rights abuses, or carbon emissions, can be a powerful influencer of company behavior.

Your ESG-related risks can have a significant impact on how your bank rates your credit risk, and on your public debt rating. Those risks include

• Your physical or sales presences in a conflict zone, or in a country with which your headquarters country is in a dispute 
• Your physical presence in an area subject to increased storm or heat risk
• Your susceptibility to litigation risk for your governance or labor relations history.

Through the power to make decisions to grant or withhold credit, and decisions that affect the price of credit, these non-regulators influence a company’s behavior, including risk management.

Insurance

On the insurance side, if you want to insure against property damage caused by environmental events like storms and flooding, then your insurance companies will need to underwrite your exposure. They may decline to insure if the risks are too great, or they will charge large premiums. Once again, the insurance diligence process drives company behavior. It pushes you to identify and manage risks in such a way that the insurance company is willing to accept the risk that it takes on, and at a price you can afford. 

Influencing Behavior Through Non-Regulation

Non-regulators – customers, debt and equity providers, insurers, to name a few – can decide whether to buy from you, lend to you (and if so, at what price), invest or remain invested in your stock, and insure you. Their power to influence your business success is real. Are you aware of the ESG risks that they are evaluating in making their decisions? Is your enterprise risk management program aware of, and managing these same risks? Contact Clear Strategy to help you satisfy customers expectations, and proactively manage your ESG risks for better ratings and pricing.